Some questions about indexes like SP500

[animap]

Hi all,
I have some questions about trading a stock indexes like the SP500. I have searched but not really been able to find good answers so I hope some kind person here can shed a light.
The SP500 is basically just a Market Cap weighted snapshot of the various stocks that is included in the SP500. So it’s nothing in itself, just this mix of all the underlying stocks. You can trade this at various brookers, which makes me intererested in the mechanics.

1. When someone makes a large purchase or sell in the SP500 index, can that affect the price of the index itself? Somehow I feel that it should not be possible, since the index value is only calculated by the value of the individual stocks. Or is the actual index (as bought by big players) actually representing a certain real amount of the underying stocks? In that case it should affect the price. If so; how big portion of a company’s stock belong to the index, and how big portion are single shares. Sorry if this sounds as a beginnier question, but I really do not understand how the feedback to the index itself works.

2 Depending on the result of question 1, it is possible for banks and big players to do such things as stop hunting on the index itself? Somehow I feel that it should not be possible if it is a simple calculation of the underlying stocks.

1. Also depending on the result of question 1, how can there exist support and resistance levels on an index itself?

Hope you understand what I mean with my questions, and thank you very much for any answers
Best regards
animap

 

[tomorton]

The S&P is calculated continuously based on the share prices of the member companies multiplied by their respective market capitalisations (they don't all have 100% of their value expressed as shares). It can only rise or fall as a result of buying / selling the member stocks.

It seems hard to believe that sufficient trading capital is speculated on the numerical value of the S&P that this could materially affect its value. However, the rise and fall of the S&P will definitely feed into buying/selling decisions by major investors in the member stocks, regardless (at this point in time) of their individual company strengths/weaknesses.

The major stock indices do respond to the rules of conventional TA in just the same way as individual equities. Or commodities. Or whatever. Which means quite well but not 100%, like everything else.

Hope this helps but its only a starter believe me.

 

[animap]

Thank you very much for the answers, tomorton!

If the value of the S&P itself cannot really be affected by buying and selling in it, it should mean that its value is kind of immune to "stop hunting" and other practicies that the big money are doing to capitalize on the positions taken by retail speculators. If you compare a chart of a forex pair and S&P 500, I think that kind of confirms it. S&P 500 looks much more smooth and "natural" while the forex very often shows short, sharp false movements in a certain direction before taking off in the other direction. I almost never see those shapes in the S&P 500.

I understand that TA can be applied to S&P 500, however I really do not understand how there could be level of support and resistance (or even less, supply and demand levels) in the S&P 500. I mean, the same value of 2800 could one day be because Apple is superhigh while financials are low, and two months later it could be 2800 again but Apple has now gone down while financials have risen. In combination with that the speculation on the S&P 500 value itself does not affect its value, then I cannot see how supply and demand levels could be established.

 

[tomorton]

The S&P is a composite valuation derived from its member companies' share values. But in a sense all share prices are also composites - Apple shares might be bought by a purchaser located in any city in the world. Their capital might be in in another country from their own and the US. Many buyers will have different reasons for buying/selling. Many will have different time-frames between the next few hours and several decades. They're all composite values and no real distinction can be drawn for TA purposes between the shares and the index. Except for what you have observed, which is a "smoothing" of price action by the index.

 

[postman]

Q. "When someone makes a large purchase or sell in the SP500 index, can that affect the price of the index itself?"

A. Yes.
How? The futures price is settled for cash at a specific time, the futures price is calculated with a fair value for that 'time to expiry' built in. If the two values drift too far apart there are arbitrage opportunities for traders to guarantee a profit. This keeps the two values a set distance apart so buying one in large quantities makes the other move relative.

Here's a link to an article explaining it.
https://www.investopedia.com/terms/i/indexarbitrage.asp


Q. "If so; how big portion of a company’s stock belong to the index, and how big portion are single shares"

A. The s&p is calculated as a weighted average by market capitalization
A visual representation of the size of the weightings is given here.
https://www.finviz.com/map.ashx?t=sec

Q. it is (is it) possible for banks and big players to do such things as stop hunting on the index itself

A. When the big boys in the market go stop hunting they buy or sell massive quantities of futures and let the arbitragers do the donkey work of dragging the index along for the ride.


Q. how can there exist support and resistance levels on an index itself?

A. Now that's just plain voodoo! But think about it like this. A share costs a certain price and gives a certain return over time so its price is range bound, the index is just made up of a lot of range bound shares so the index too is range bound. But its waaaayyyy more complicated than that.

Hope that gives you something to think about.

Hi all,
I have some questions about trading a stock indexes like the SP500. I have searched but not really been able to find good answers so I hope some kind person here can shed a light.
The SP500 is basically just a Market Cap weighted snapshot of the various stocks that is included in the SP500. So it’s nothing in itself, just this mix of all the underlying stocks. You can trade this at various brookers, which makes me intererested in the mechanics.

1. When someone makes a large purchase or sell in the SP500 index, can that affect the price of the index itself? Somehow I feel that it should not be possible, since the index value is only calculated by the value of the individual stocks. Or is the actual index (as bought by big players) actually representing a certain real amount of the underying stocks? In that case it should affect the price. If so; how big portion of a company’s stock belong to the index, and how big portion are single shares. Sorry if this sounds as a beginnier question, but I really do not understand how the feedback to the index itself works.

2 Depending on the result of question 1, it is possible for banks and big players to do such things as stop hunting on the index itself? Somehow I feel that it should not be possible if it is a simple calculation of the underlying stocks.

1. Also depending on the result of question 1, how can there exist support and resistance levels on an index itself?

Hope you understand what I mean with my questions, and thank you very much for any answers
Best regards
animap