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Strategies & Market Trends : MDA - Market Direction Analysis
SPY 687.72+0.7%Jan 5 4:00 PM EST
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To: j.o. who wrote (33844)11/20/1999 9:58:00 AM
From: Christine Traut  Read Replies (1) of 99985
 
j.o.:

Great post. Great debate. Great site. I can see that I've come to the right thread.

You've convinced me that some large institutions and traders are clever enough to understand the indexing effect and exploit it to their advantage. You have not convinced me that this leveraged action is sufficient to bring the stocks which happen to be in the indices back to something approaching 'market value'.

I'd also like to explicate Daniel Akst a little. He's not criticizing the 'little guys' use of index funds. He's saying that, when only a small percentage of people index, the system works just fine. But, like the tragedy of the 'free' commons where everyone can graze their sheep but each farmer sells his flock as an individual, the system collapses as more use it. If people truly held a basket of every stock in the market - instead of just the lucky few chosen by the S&P committee - then we would have no value discrepancies in specific issues, just an overall inflation of the market. I'd submit that that would still be 'evil' in some sense, since you don't have a true market if people are just coming in and buying. You have a valuation bubble.

I also think that there is a psychological effect to all of this. Indexing, as you noted, may help momentum. It certainly serves to prop up certain stocks like Microsoft, making them look bulletproof. If this market does end badly, I'll bet you right now that John Bogle and the Motley Fools catch some retroactive heat.

Thank you for your excellent points. This is definitely a worthwhile topic and I'm finally finding people who are interested in talking about it.

Christine
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