DID YOU KNOW?
You can “spy” on the SPY
In our Did You Know? blogs we provide readers with useful information that is generally not widely realized by inexperienced investors. In this edition we will discuss the various ways to take a look “under the hood” of the S&P 500 Index, beyond the face value of its technical price chart and perceived trend.
The S&P (Standard & Poors) 500, as we know, is made of the top 500 large-cap company stocks, that occasionally change based on qualifying financial parameters. Each company/stock, however is not “weighted” equally in the amount of share percentage held (see our Financial Focus – Are you overweight? blog dated 4-19-24 for more details). In other words, each stock does not consist of 1/500th (or .02 %) of the index. Leading industry stocks tend to be weighted heavier based on popularity, momentum, market cap, and performance. Sectors are also weighted differently, with financials, information technology, consumer discretionary, and healthcare currently making up two-thirds of the index, and real estate, utilities and energy only making up about 8%. Current weightings can be researched on many financial sources, including Yahoo Finance, Forbes, Morningstar, etc.
When observing and assessing the S&P 500 regular technical price chart, you are, by default, presented with the uneven, individually weighted, version of the index, during the selected time frame. The results will be a price chart that represents a potentially skewed picture of the index performance, IF larger weighted stocks were stronger than lesser weighted stocks during that time-period. The “health” or “breadth” of the market, as discussed in Chapter 3 of our recent publication When to Buy and When to Sell: Combining Easy Indicators, Charts, and Financial Astrology (available on Amazon), can be measured through various indicators like the Advance/Decline line, the Put to Call Ratio, and others, to determine if there are any “warning” signs of price reversal.
During the recent bull run in the S&P 500, you may have heard of the “Magnificent 7” stocks that have clearly led the recent rally (including Microsoft, Apple, Nvidia, Google, Amazon, Meta, and Tesla). What is lesser known is that the other 493 stocks making up the index have barely broken even (slight gain) over the long uptrend. One very easy way to quickly recognize the possible “distortion” is to compare the SPY ETF chart with the RSP ETF (equal-weighted SPY). The RSP removes all the unequal weightings and assigns the 1/500th share designation to all stocks in the index evenly, and presents the performance based on those conditions. These two charts over the past few months look very different, as the RSP is essentially flat. There is also the same comparative tool with the Nasdaq (QQQ ETF) index as well, with ticker symbol QQEW.
Another way to “spy” on the SPY is to review the section on StockFetcher.com., where there is a consistent tracking of the percentage of equities trading above their 50, 100, 200-day moving averages. This reveals information similar to the Advance/Decline Line (ADL), though more specific. The higher the number/percentages of equities trading over these MA’s, the healthier the market is considered, while the higher the number of equities trading below these MA’s, the less healthy the market is thought to be. This information covers both indexes and sectors, which we will also continue to discuss in future Indicator Insights and Sector Search blogs.
Yet another avenue for looking “under the hood” of the SPY is to review insider and institutional buying and selling, which can be found on sites including BarChart, Finviz, and others. Make sure your sources are up-to-date however, as some of these investors/traders are not required to report their transactions for up to 90 days, which may negate the effect of the knowledge for short-term investments/trades.
***This is not a recommendation to buy, sell, trade, or use options regarding the above ETFs, though they can be of assistance, with other select charts and indicators, to assess the “real” underlying condition of certain equity markets.
