Jim; I'm trying to dig up more info, but so far haven't found
much. I want to know for sure how they are weighted, and exactly
what companies will be in each.
Cap weighted indexes have a built in flaw, unlike dollar weighted
ones where each company even the small ones effect and reflect
in the index the percentage of their growth.
In short Dollar weighted ones give a real picture of the growth
or contraction going on in the economy.
Mcgraw Hill and their cap weighted ones with all the derivatives
have screwed up the markets ability to price them on FA..
The larger caps control more of the index , and
just have to be bought more by index tracking funds.
This seems ignored by even the big boyz, ( but they exploit it )
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Hedges in a cap weighted one; = you can buy the index, and short
the little ones, or buy the big ones and short the index,
the big ones always out do the little ones over time.
It's built in. It's also wise to figure out just how many
active indexes that have popular derivatives that a stock is in.
Msft is not at it's high just because of regular i> investors ,
it's there because fund managers don't see a way out , it's
in the NDX the OEX the SPX , and the IXIC, the first three
all have a lot of derivatives on them, and MSFT dominates
control; 23% of the NDX is MSFT.
When the market goes up derivative players have to buy more and
more of the big caps to stay weighted but on down turns they are cushioned as the regular funds can't , and long term players don't jump out like a school of fish. Or and if by the time they do
it's the smaller caps in the index that always get hit the most as they are less liquid. Bigness just makes more bigness..
Thanks to cap weighted indexes and funds tracking them via
derivative arbitrage trading. It's a flaw in the system,
but so much money is now involved that no one has the guts
to correct it. And others don't want to as it can be exploited.
Me I can't do anything about it even though I know in the long
run it's insane, so I may as well belly up to the table and
at least try to get my share.
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So much for all that, with the sector webs the same thing will
happen if they are cap weighted and I expect they will be,
in each sector the largest cap , will "most likely"
do the best over time, ( provided it's not in some other way
handicapped.) Consideration also has to be given to the other
indexes it's in , and what percent of the arbitrage trading
it commands in each one.
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Lets say all things equal ABC is very close to the weight of
XYZ and in the same cap weighted sector index, so they both will have about the same clout in it and in the SPX; BUT ABC is in the OEX and xyz is not. Also ABC happens to be in the DJI, and xyz isn't, nor
is xyx in the NDX, well ABC has a strategic advantage ,
and in time that will push the ABC stock ahead of xyz,
who's only hope to match ABC will be that it gets bought out or (eaten up) by another company who is more than anything trying to use it's shares as money to expand so it can have bigger base to
build it's market cap on.
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Strategic planers know that when they do a stock spilt,
if the are in the SPX NDX or OEX it's not just that the cheaper price can attract more buyers, it also builds a bigger base to build market cap on..the split don't diminish their clout in the cap weighted
index..but they struggle hard over a split if they are in the DIA,
as in the DIA it's price weighted, a stock split may help them
SPX wise but will hurt then DIA wise, so it gets down to does the
help out weigh the hurt.
One more note, Dow stocks that are also in the SPX, AND OEX,
have an advantage over them that are just in the SPX but not
in the OEX, no DOW stocks are in the NDX. When looking at this
advantage consideration has to be given to the Market cap size,
as the more they have the bigger the slice of the pie they
get from arbitrage trading in those other indexes.
Last so while it can be argued that market cap does not effect
the way Dow stocks effect that index, it sure does one step
removed or by proxy because they are not "JUST" in the Dow.
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Indexes can be more complicated than they look, I'm real proud
that I have made up TWO Dow indexes one cap weighted and one
exactly weighted like the DOW, both are dynamic meaning
they re-weight on the fly as I update prices..I get off to seeing
how the cash allocation in the DOW changes , and it some times
tips me as to what stocks "will have to be bought or sold"
if a computer program buy or sell program kicks in, however
keeping up with fair value on the Dow futures to anticipate
the buy/sell programs is choir I'm not generally up to.
Triple witching at the end of the day today was interesting,
but I'm not sure that peak up indicates anything but to let
the buyers unwind leveraged derivatives, as it peaked futures
started selling off. Next week could be a new ball game, I
sense some downside pressure, but I'm not real sure of it,
at any rate I'm accumulating some gold stocks. They can talk
about inflation being tame, and from the rear view mirror it
looks that way, but I see Kellogg jacking up prices, as well
as some others , and if oil does goes up, also with more rate cuts next year, then dollar will lose more value, they can only talk inflation down just so far, sooner or later the people
will see it, as wages take a hit, and the hawks get back
their trickle down economy.
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I never meant to write so much, but just to ask if you find any more
info or urls on the new sector webs please pass them on.
Jim
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