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Strategies & Market Trends : MDA - Market Direction Analysis -- Ignore unavailable to you. Want to Upgrade?

To: HairBall who wrote (2893)	12/26/1998 11:01:00 PM
From: James F. Hopkins	Read Replies (1) \| Respond to of 99985

Lg ; You got most of it right, Re BUT A single long investment made at one time and allocated per the stock weighting of an Index will for the most part stay current with the weighting changes of that Index. (Assuming the monies are left long and the stocks in the Index remain the same.) This don't work like it looks, believe me you will fall behind in a climbing market, and if the market goes down you will also be left holding the bag..I'm telling you cap weighted indexes are tricky, and not what they seem. However, where your point comes into to play is when new monies are invested. The front runners will always require a larger percentage of the funds, thus creating a supply demand scenario that continues to drive the highest weighted stocks in the Index. As Index funds are constantly investing monies, they are constantly driving the highest weighted stocks. YES and this is the main point , and the most important one, as knowing new money collects towards the top is key to most of my strategy RE> However, if a true Bear raises its head, the reverse will happen. Something to keep in mind. Also, if a front runners falls out of favor and its price begins to drop it can cause an over reaction as Index Funds reallocate. This is mostly true..but its not the exact reverse as when the over reaction does hit, the selling gets intense across the board, and the thinner traded stocks just collapse much faster. This is not so much from the indexers pulling out as usually they never bought a lot of these to start with..I think it's just the psychological mind set in sell offs that take down the smaller ones faster, there is an exception ( if it was a pure momentum play on the way up and not truly a BIG over 100B cap stock, it can power down , the real big caps may fall a lot but still get a cushion to land on, maybe it's that old long term investor mentality that the brokers preach to the masses, but what ever it is the huge caps seldom take it on the chin as much in sell offs, --- thus when the next run starts they once again wind up getting more of the new money, and the big get bigger while the small get kicked in the teeth and pushed out of the index. And some new star is brought in. -------------------- You know I never tracked it, but just how often do they have to bring in a new star to keep the hype running, it may be an indicator of how healthy the market isn't. Were can we find all the records of new inductees to the 500..? Have you ever seen one replaced that was growing.. Jim