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Indicators based on the "advances" and "declines" concept -
Why analyze the S&P 500 index?
Why do many professional money managers track and analyze the
Standard & Poor's 500 Index ("the S&P 500 index” or simply "the S&P 500”) even
though they may not necessarily include any of the index’s stocks in their
portfolios? The answer is that the S&P 500 is widely considered to be the
foremost index that best reflects the mood (sentiment) of the broader market.
Following are some further facts about the S&P 500 index:
- The S&P 500 comprises 500 of the biggest and the most successful U.S.
companies. The 30 companies that make up to the Dow Jones Industrial Average
(DJIA) are all included in the S&P 500, as are about half of the companies
listed on the NASDAQ 100 index;
- In 2004, the average daily trading volume of the S&P 500 exceeded 1.6 billion
shares. For comparative purposes, the average number of shares traded daily on
the New York Stock Exchange (NYSE) was roughly 1.7 billion;
- The index level of the S&P 500 is
a reflection of the total market capitalization of its constituent
companies. (A company’s market capitalization, its "market cap”, is
calculated by multiplying its share price by the number of outstanding
shares);
- An array of index shares (e.g., SPY), options (SPX), and futures (S&P 500 and
e-mini S&P 500) derived from the S&P 500 index are among the world’s most
popular trading tools;
- A large number of mutual funds track the S&P 500. For instance, the Rydex
Dynamic Tempest 500 Fund (RYTPX) was designed to correlate to the inverse of the
S&P 500 (RYTPX primarily engages in short sales of securities that are listed in
the S&P 500). The fund also strives to apply leverage (by means of futures
contracts and stock and index options) in order to gear its exposure to 200% of
the S&P 500 index.
Above we have listed some of the main reasons why the S&P 500 is considered to
be one of the best gauges of market activity and market mood. Ongoing tracking
of the S&P 500 index should thus be considered ‘mandatory’ for investors /
traders who are serious about market analysis.
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A. v. S.
V. K.
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