HI Jim; I think a separate thread for the Diamonds is a good idea.
The Dow index is a far different animal than the S&P index.
Not too many people may realize they work a lot different,
I consider myself more a strategist than an analyst and the
difference glares at me, but I may not have the skills to explain
it very well.
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The primary thing is the way the stocks in each are weighted,
Three primary ways indexes work price weighted, cap weighted,
and dollar weighted.
The Dow is price weighted. The S&P is market cap weighted,
The new internet index is dollar weighted.
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Price weighting means you put more cash in the higher priced
stocks, and the index moves up or down an equal amount for each
dollar move on any stock in it no matter which one.
ie the Dow moves just as much on a $1 move of UK ( the smallest
cap in it ) as it does for GE the largest one.
so a $1 move up in GE is offset by a $1 move down in UK.
In one respect this don't make a lot of sense, but that's the
way it is and understanding it is essential if you play the DIA.
One other thing about the Dow is that it does not include Nasdaq
stocks, this is important from the stand point of understanding
what happens with program arbitrage trading against the futures
and the derivatives that many many funds are now doing.
That's very complicated so I won't attempt to explain it at this time,
except to say that the arbitrage trading is what you are seeing on
when you see a lot of volatility, the vast majority of investors do
not jump in and out of stocks like a school of fish, that's the
computer program trading, and it effects the Dow differently than
it does the S&P.
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Unlike the Dow the S&P is cap weighted where you put more cash
in the large cap stocks percentage wise than the small cap stocks,
irregardless of price.
On the surface this makes sense as it seems to represent the
widest held stocks more than the thinner held ones, hence many
people believe the S&P better represents the market than the Dow
does, ( not just because it has more stocks but also because of
the way they are weighted. ) Still the index is not exactly
what it looks like , and as more and more index tracking funds
program arbitrage trade in it; a problem most people would like
to ignore is getting larger.
The index funds have to buy more of the large caps on any up turn,
well one may say they have to sell more on down turns, but being
other funds and 401ks can't trade that fast the downside gets
a cushion ( until panic sets in ) at which point the smaller
caps in it generally crash harder than the large and more liquid
ones. ( note down turns are more often sharper than up turns )
To complicate it even more many of the S&P 500 (SPY) stocks are
traded in the Nadaq 100 as well as the S&P 100, that's also
one of the primary reasons you are seeing such high P/Es in the very largest of market cap stocks, the arbitrage system , derivative , program trading systems and the commingling that happens when these are traded in several indexes tends to force large caps up beyond
reasonable earning levels, and analyst are beside them self trying
to justify this in one way or another. But believe me index arbitrage
trading has and is changing the face of the market.
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The last popular way to weight stocks is "dollar weighting"
Like the internet index. Here you place equal cash in the
stocks in the index, and each stock then changes the index
an equal amount according to the percentage gain or loss of said
stock. None of these indexes work alike, if you set up the
very same stocks, and weight them each way you will at times
see a large divergence in the way each type of index moves.
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1; price weighted index, responds equal to dollar moves of any stock
in the index.
2 Cap weighted responds to larger cap moves more than smaller cap
moves. ( MSFT can move the nasdaq 100, over 25 times more than most
of the smaller caps in it for each $1 move and it rules the S&P 500
now )
3 Dollar weighted responds equal to the percentage moves of any
stock in it. ( the most resonable way to rate stocks, but not the
best way to make money )
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The 4th type is like the SOXX, here you own the same amount of shares of each stock in it, regardless of price or market cap.
It makes less sense than any of the indexes.
Ie in the same time the SOXX index is up 13.7% , the same stocks in it; market cap weighted; are up 36.45% , and that's a big
difference and I track them both ways <G>
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Back to the beginning, it's good to have a separate thread for the
DIA, it dances to a different tune than the SPY..
and in fact at this time if it were cap weighted instead of price
weighted it would be higher than it is right now.
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To trade these things and not have a basic idea of how they
differ is to leave out some of the most important nuances that
move the indexes. ( liquid is a thing I watch ) more than
earnings, the more liquid the market is the less risk for
a trader, you can watch the DOW as a whole become liquid and
become less liquid, and it's often a leading indicator.
the top 10 stocks in it ( market cap wise ) hold four times
the amount of liquid than the bottom 20. Bust it apart into a
head ( the top 10 ) and Tail the bottom 20 caps, and note
how and when the Tail wags the dog. Most of the Big money is in
the top ten stocks, and that's an understatement, 4 times as
much is in them ) yet the way it is weighted the thinner traded
ones (with much less float) can kick the index like hell, UK can
make it move just as much as GE, per $1 move in her price.
Yet GE represents a lot of liquid, let her fall enough , and then
let program trading kick in and as they start to sell the less liquid
stocks she falls much faster..( it's becuse of the float )
In other words the Dow index moves the same with each $1 dollar move
of any stock in it, but when the smaller caps move
they move faster hence the index speeds up.
Well the best tip I can think of is,
not one I will post on a public thread, I'm afraid if to
many people see it, then it wouldn't work as good.
But I have said enough that any one who wants to do
some thinking should be able to figure it out. <G>
Jim
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