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

To: John Pitera who wrote (36926)	1/29/1999 6:33:00 PM
From: James F. Hopkins	Read Replies (1) \| Respond to of 94695

Hi John ; Well back to the Market, and about the S&P Index. I have said more than once it gets Top heavy, and another reason just came to me. First I could see that index funds are forced to buy more and more of the large caps as it goes up. These become very liquid and on down turns don't drop as fast or as far. Only a real melt down would cause them to drop like the smaller less liquid ones. Hence the way the stocks are weighted and with so many index funds, the BIG tend to get bigger. ( It may take years but it does set up a huge melt down at some point in time , as the S&P gets more and more top heavy; just were the point is that the liquid factor wont work on a down swing we have no real way of telling until it happens ) -------------------- The new thought that came to me, is the Mergers between BIG Companies. This also helps or adds to the TOP heavy effect. In this situation take XON and MOB merging, well the indexers buy on weight so when you ADD their weight together at first glance it appears that this will be no more than if you had were already weighted separately. However when these two BIG caps become one, it's not the same to the index as adding the caps together. As now you wind up with 1 less company in the 500, and another has to be brought in. No matter how hard they look they won't find a company to bring into the 500, that has near the cap of even the smaller of the two big ones that got married An example would be you have 170 shares of XON , and 42 of MOB, added together you get 212 , the rub is if the new company coming into the index is smaller than MOB, and it will just about have to be smaller , as anything near that big is already in the S&P. Hence the marriage of two BIG caps adds to effect already in place of the BIG caps getting bigger by index funds having to buy more of them. ( some will say they have to sell more, in a down turn and that is mostly true, but they are easier to sell in a down swing than smaller less liquid ones so they don't crash as hard at least up to a point, a point I don't think any one has figured out. ------------------------------ Now I have talked myself into more work, while I may not can figure the point out, I should be able to find a way of checking the relative motion to at least see it when it happens. Like the if the Big ones do start falling much faster than the small ones it's melt down time. Jim