MDA - Market Direction Analysis Message Board

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Strategies & Market Trends : MDA - Market Direction Analysis

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Nov 14 4:00 PM EST

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To: j.o. who wrote (33768)	11/19/1999 1:25:00 PM
From: Christine Traut	Read Replies (3) of 99985

I've been lurking here for a while - Flatsville sent me. You seem like a good group to give me feedback on a fundamental/technical factor about this market that has bothered me since I read a piece by Daniel Akst for Slate in August of 1997. slate.com Akst's piece is called Passive Aggressive: Index Investing is Evil. The basic hypothesis is that the 'market' is correct in valuing a stock only if there is a market judgment - someone deciding whether to buy or sell. If very large numbers of people decide that passive index funds are a better way to invest (thank you Motley Fool)then those funds are arbitrarily buying a list of stocks which happen to be part of an index. I read on the Microsoft accounting protest site that MSFT's market weighting on the S&P is close to 40%. If that is wrong, the example still holds. For every $1.00 invested in an S&P index fund, someone has to arbitrarily buy $.40 worth of MSFT, with no judgment whatsoever about the relative value of that stock. Sure explains a lot to me. The bubble in the 'blue chip' techs. The extreme 'valuations' in the market. If there is a self-perpetuating bubble in certain stocks because of indexing, what factors could cause that bubble to burst?

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