Co-relation between indices and individual stocks

Hi Guys,

I am not a very intelligent guy when it comes to the markets and something has been bugging me for long now -

What would you do if an index and an individual stock under it are moving in different directions based on technicals?

For example, does it makes sense to go long on an individual stock if the index its listed under is in a downtrend? Please share your views based on day trading as well as position trading.

What do you think is the best strategy under such conditions?

Regards,
Vipul

Have you ever tried p*ssing into the wind?

Well that's a good way of explaining it

Any one who had a different experience?

Regards,
Vipul

Maybe look into the weightings of different sectors of the index, sector leaders, and so forth.

So what would you do exactly if a stock has a strong technical buy but its sector as well as the index as whole is in a downtrend? Will you stay away from the stock?

What if the stock does not belongs in the composition of the index?

I'm just a learner like you mate and I don't trade stocks but personally, on a technicaly basis, I wouldn't touch that long with a barge pole on anything longer than an intra-day TF. If I'd done due dilligence on the company etc and believed in it as a long-term investment and it was not in the composition then it's a completely matter and I'd be considering a whole array of other factors.

Hopefully somebody with some experience could help you out more. I suggest asking Mr Charts. Insofar as you can believe anything you read on forums, he trades stocks.

Thanks for the replies Scose.

I am a short term trader and tend to hold stocks for 15-20 days. And I often day trade as well. So I would be glad if someone could answer my doubt based on these two frames?

Regards,

Hi friends,

Can an expert please step up to my problem? Please!

This is killing me. When you are trading based solely on technicals, do you guys always initiate a trade if the index and the particular stock are in the same direction?

Can I initiate a trade without actually worrying about the index?

Please help me out!

Regards,
Vipul

vipulkrgupta said:

Hi friends,

Can an expert please step up to my problem? Please!

This is killing me. When you are trading based solely on technicals, do you guys always initiate a trade if the index and the particular stock are in the same direction?

Can I initiate a trade without actually worrying about the index?

Please help me out!

Regards,
Vipul

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You can do what you like. The reason you have no answers to your question is obvious if you think about it. If it was as simple as correlating index&constituent everyone would be doing it! You will find (suggest read Market Wizards) that money is often made by going against the flow.
You really need to make things much simpler for yourself.....I don't trade shares, however if I did I wouldn't care two hoots what the index was doing so long as the constituent was going in the right direction.
You should also consider whether anybody elses opinion is in better than your own investigation.....opinion is helpful but facts are much better....DYOR.

Windowsill said:

.....I don't trade shares, however if I did I wouldn't care two hoots what the index was doing so long as the constituent was going in the right direction.

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Hey! Thanks for the input. I have been doing my research, and have seen that most stocks with high liquidity will move in tandem with the major index, in my case the Nifty 50.

Forex is so much better when it comes to this issue, at least its not dependent on any index, right?

vipulkrgupta said:

Hey! Thanks for the input. I have been doing my research, and have seen that most stocks with high liquidity will move in tandem with the major index, in my case the Nifty 50.

Forex is so much better when it comes to this issue, at least its not dependent on any index, right?

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IMO the index moves in the "right" direction because the constituents already have!

Windowsill said:

IMO the index moves in the "right" direction because the constituents already have!

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Wow! I never thought it that way! You are right.

Windowsill said:

IMO the index moves in the "right" direction because the constituents already have!

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You did said in the previous post that you do not trade in individual shares, can you share with me why not? Being a rookie, I know that there is much more profit potential for the amount invested in an individual stock than an index.

I day trade and shares just don't move enough. Having said that I would be quite happy to trade BP if I had the time and happened to be in front of the screen, and I decided it had made the low/high for the day. Again I would not be bothered what the underlying index was doing...Because BP is moving and the spread is quite small there is potential for profit on smaller time scales.

vipulkrgupta said:

Wow! I never thought it that way! You are right.

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Conversely if you monitor indidual stocks and compare their relative movements compared to an index such as the INDU you can guage how far they move (in relative terms) compared to the index and see how weak or strong they are behaving.

If you then monitor the index you would expect the stronger/weaker stocks to move more in relative terms than the index in the prevailing direction of the market. This also provides a determinant of risk (and also of position size) i.e. those stocks which are less highly correlated or negatively correlated

Take a look at the technical traders forum here to see how this was utilised by Grey1.

Charlton

Im not any expert by any means, but if you strongly thought that share X was going up in future but you also thought index Y would go down, then couldnt you hedge your position and buy X and short sell Y? - that way, even if you were wrong i.e. share X goes up but the index Y goes up aswell, then you wouldnt really lose any money (or you'd lose less money than placing a naked trade at least) because your position is hedged? - thats the theory anyway, ive never done it before myself.

Pi3141 said:

Im not any expert by any means, but if you strongly thought that share X was going up in future but you also thought index Y would go down, then couldnt you hedge your position and buy X and short sell Y? - that way, even if you were wrong i.e. share X goes up but the index Y goes up aswell, then you wouldnt really lose any money (or you'd lose less money than placing a naked trade at least) because your position is hedged? - thats the theory anyway, ive never done it before myself.

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Hedging is always an option. Although it will help cut losses, but it will always eat away the profits in form of premiums, like insurance.

I did some stock trading on FTSE last year with hold times of 1-5 days. If the stock you are interested in is part of the index, don't trade against the direction of the index is my advice.

If the weight of stock purchasing, reflected in the index is long (probably due to economic/fundamental reasons) then an individual stock nose-diving will be pulled up with the economic sentiment. The relationship with index futures and arb trading will also ensure that economic/fundamental views get reflected into the equities that form the composite.

Don't trade contra-trend if you're hold is 20 days. Like scouse said, you're p1ssing in the wind and contrarian views are likely to be crucified, on balance if you are essentially a trend follower. If you are looking for reversals then that is different.

I wrote a stock screener when I was doing this stuff which classified the constituents into one of 4 quadrants based upon the stock being bearish/bullish and stronger/weaker than the index in relative turns. Monitoring how this changed day to day showed how the sentiment of the index shifted over time as the weight of stocks moved from bullish to bearish, leading the index to move from bullish to bearish. The converse also occurred when moving bearish to bullish.

Do more homework is my advice and break the problem/market down so you can identify what you need to know in order to make an entry decision. You won't get an answer here outside of "Don't do it" or "Do do it". You find your own way with these things. If you don't, you lose your money.

robster970 said:

You won't get an answer here outside of "Don't do it" or "Do do it". You find your own way with these things. If you don't, you lose your money.

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I agree.

robster970 said:

I did some stock trading on FTSE last year with hold times of 1-5 days. If the stock you are interested in is part of the index, don't trade against the direction of the index is my advice.

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What if the stock does not belongs to the index, any thoughts on that?

Guys, I am sorry if you think I am a fool just stretching on the same question but the fact is although I can figure this out myself, it might take months to study the relation between index and stocks (under and outside the index). I am just hoping that the experience of someone from amongst you could come handy. That's what forums are for, isn't it, sharing and helping:innocent:

Regards,
Vipul