FINANCIAL FOCUS
The Indexes
In this installation of Financial Focus, we will discuss the topic of the Indexes, including the Dow Jones Industrial (DIA), S&P 500 (SPY), the Nasdaq Composite (QQQ) and the Russell 2000 Small Cap (IWM). As always, we will provide some education and commentary for the inexperienced and/or uninformed.
In Chapter 1 of our publication When to Buy and When to Sell: Combining Easy Indicators, Charts, and Financial Astrology (available on Amazon), we briefly discuss the major indexes and Exchange Traded Funds (ETFs), some of which track the indexes in either direction, and some with leverage.
The four major indexes include the Dow Jones Industrial, which generally consists of large capitalization stocks (over $10 billion) known as “Blue-Chips,” considered the “cream of the crop,” including financial and industrial stocks like IBM, JP Morgan, Visa, Home Depot, Caterpillar, WalMart, and many others. The Nasdaq is heavily constructed with technology companies like Nvidia, Microsoft, Meta, Tesla, Google, Apple, and Amazon (known as the MAG7), as their top holdings. The S&P 500 is the common barometer which essentially combines many of the leading DIA and QQQ stocks, as well as other large-cap companies.
The Russell 2000 is another popular barometer, comprised of the leading “small-cap” ($250 million - $2 billion capitalization) stocks that usually consists of “up-and-coming” companies that have not yet reached mid-cap status ($2 billion - $10 billion), like HIMS (personal care) and IONQ (quantum computing). There is a Russel 1000 and Russell 3000 Index that can also be tracked based on one’s preference. The QQQ also has a more concentrated index known as the Nasdaq 100. The S&P has even more options as it breaks down into several categories, including styles like Growth, Value, or Mid-cap, and a smaller concentration known as the S&P 100.
These examples are the major indexes, however, as there are countless others focusing on sectors, sub-sectors, industries, and sub-industries, including commodities and currencies. Many are also presented in the form of an Exchange Traded Fund (ETF), as they hold company stocks in focused categories/sectors, and are sponsored by financial institutions. For instance, the Vaneck’s Semi-Conductor ETF (SMH), contains only semi-conductor companies such as Nvidia (NVDA), Taiwan Semi-conductor, (TSM), Broadcom (AVGO) and Advanced Micro Devices (AMD), which are their top 4 weighted holdings. Please note that these holdings are all included in the Nasdaq indices, so beware not to overload your portfolio with the same stocks. An example of a commodity index is GLD, which tracks the spot price of gold, where the gold miner’s ETF GDX holds specific gold mining companies - so be sure to know the difference.
Other lesser-known indexes include the RSP and the QQQE. The RSP gauges the S&P 500 (SPY) as if all holdings were equally weighted, while the QQQE does the same for the Nasdaq. This is important as they reflect the true current “nature” and strength of these indices when removing the weighting percentage. The chart direction or pattern will then provide an accurate depiction of the Advance/Decline Line (also discussed in our publication), which tracks how many holdings are advancing vs how many are declining. This ratio reflects the underlying strength or potential weakness in the current trend, and can be very useful in shorter-term trading.
Regardless of which exact indices or sectors one chooses to track or trade, there are some finer details to know…
· An index or sector ETF is normally heavily weighted with the most valuable companies in that category. The stocks are not weighted equally, therefore, those “leading” stocks will move the price much more than the lower weighted constituents.
· There is a trading strategy known as “sector rotation” based on economic conditions, changes in interest rates, seasonality, and market emotion (see our publication and other blogs for more details). Many institutions use this strategy for their fund management.
· When an index or ETF is trending in one direction or another, it is usually based on price action reflected by the leading stocks, or the majority of stocks, contained in the group. Not all stocks contained will follow that pattern, however, and a “strong” stock in a group decline, or a “weak” stock in group advance, may signify a good trading opportunity once a price reversal occurs.
· Always compare a selected stock to its index or industry to determine its current correlation to that group’s price action.
For additional discussions and education, please continue to visit our BLOG section here on ASTRO-FIN, where we provide periodic updates on a variety of topics.
***As always, this information is not intended to be financial advice, or any specific buy or sell recommendation, but rather a guide to assist the reader in some further understanding of current economic conditions.
