Coz,
I agree pretty much with Patrick's view.
The S&P 500 is a capitalization weighted index, so the stocks that the index arbitrageurs trade tend to be the ones like GE, T, MO, IBM, XON, etc. In fact, the stuff that I have read about index arbitrage implies that the traders have a computer (called superDOT, linked to the NYSE) that they just load up with a "basket" of say the biggest 20 stocks. Then they just hit "buy" or "sell" on the basket. This provides enough diversification to effectively mimic the entire S&P 500, yet keep transaction costs low. Check out Standard & Poor's web page (I don't know the link offhand) to get the list & percentage weighting.
When I was trading, I watched the intraday movement of the premium versus the S&P futures/cash. Let me tell you IMO what is happening when you observe "When they announce the market has a positive bias of 40 points at the open, it doesn't open 40 points higher it opens and moves up." The opening index value (at 9:30 sharp) is actually calculated from yesterday's closing stock prices. But the specialists sometimes take a few minutes to open the stocks, because they need to estimate the best "balance point" between buyers and sellers. So as the various stocks open, the index value will go from unchanged (from previous afternoon) to whatever it will be when all the stocks are open. So if the S&P futures are up 4 points at 9:30 then that translates into roughly 40 Dow points. The specialists will have tons of bidders on their stocks in that case (arbitraging the S&P). Then because of the order imbalance they take a while to open their stocks.
So the net result of this is that unfortunately your perceived opportunity is not one! Reason - when the market is called to open up you can't actually buy the stocks until they're open - and when they do open, they're up already to reflect fair value with the S&P.
Hope this helps.
Michael Friesen |
