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Strategies & Market Trends : Waiting for the big Kahuna -- Ignore unavailable to you. Want to Upgrade?

To: Oeconomicus who wrote (26518)	9/4/1998 2:23:00 PM
From: IceShark	Read Replies (1) \| Respond to of 94695

Bob, As to your theory about index funds driving the underlying equities upward and becoming a self fulfilling prophesy, I believe, as do most other people I know that this is a fact. Like a mechanical fact. -g- It will work on the way down, too. I don't think net fund flows to a particular index fund causes these market-on-close orders. Given the past constant net inflows everyone and his brother should have noted pervasive up-spikes on closing trades (although maybe some smart ones did and started trying to offset to take advantage of it? -g-) I think the funds just make orderly purchases and sales in the normal course of business to put the money to work, in their brain dead fashion. An even more extreme example should have been observed when an issue gets added to an index. In the old days it provided some support, but it wasn't all that spectacular - sort of like a dividend capture play (no one talks about them anymore.) But with this manic market and pet fad for making money, the speculators are driving up the new equity's price more than index funds, I suspect. You sure see the temp pops fade pretty fast. I also think your conclusions regarding how quickly and fully invested a fund must be, hence how rapid they must buy or sell equities, are incorrect. They are going to have some cash laying around for working capital, if nothing else for settlement delays and the natural positive DDA float they get since incoming cash is debited right away but there are clearance delays on payments to investors. Also, most funds have lines of credit with banks to float any temporary cash needs so they don't have to conduct a crisis sale to deal with a redemption blip. So, my take on this is that it is a rubber band type of situation. You will not see an immediate 1 to 1 response. But make no mistake, the pressure on the rubber band must be relieved at some point. Regards, IS