Are Individual Stocks Leading The Indexes?

[ChartAdvisor 10]

One of the benefits to reviewing hundreds of stock charts each night is that I can often see patterns developing across multiple charts that provide insight into where the markets are. One of the current themes I am seeing develop across multiple sectors is that many stocks are close to testing the top of their current bases. This is interesting because the major index ETFs are lagging this price action. This could be due to certain component stocks underperforming, or even a rotation into certain sectors. Price action in individual stocks, especially when seen across a large number of stocks, will often act as a leading indicator for the indexes. If this is the case, then it’s possible that the markets will be testing their recent highs soon.

 

IDT Corporation (NYSE:IDT) is a stock that has been testing the $29 level for months as it works on a consolidation. It attempted a breakout a few days ago that failed. However, the reversal has not followed through and if the markets show any strength whatsoever, it could finally allow IDT to clear its base. On the downside, ... Read entire blog post here

[TheDude 10]

Interesting.

 

Many funds will use a subset of an index to trade rather than every index component. The subset will be those stocks that have a closer/higher correlation to the index than the others. They do this to lower transaction costs, but the slight downside is increased tacking error (something some ETF's suffer badly from). Generally, the smaller the fund, the smaller the subset will be. A very small fund may just use an ETF rather than a basket for their basis trades.

 

Hope that may be some food for thought.

[MadMarketScientist 11]

Interesting.

 

Many funds will use a subset of an index to trade rather than every index component. The subset will be those stocks that have a closer/higher correlation to the index than the others. They do this to lower transaction costs, but the slight downside is increased tacking error (something some ETF's suffer badly from). Generally, the smaller the fund, the smaller the subset will be. A very small fund may just use an ETF rather than a basket for their basis trades.

 

Hope that may be some food for thought.

 

Those reasons sound plausible for funds and ETF's. But I think the author was speaking about certain stocks leading the the major indexes themselves, not just funds that replicate the indexes.

[TheDude 10]

Well yes they will because there are more index followers who trade these few stocks, so they make the move first, then the basket buyers move in....domino....

 

im shot - probably not explaining it well.

 

anyway, its the algos man i tell you. its all their fault. id tell you why but no one would understand its just too complicated. just blame it on the algos and be done with it. hehehehe.

[Tams 20]

according to Dow Theory,

transportation leads recoveries.

[TheDude 10]

good basics tams, but things have changed since dow theory was first published - different forces in the economy, but the premise is correct. transports then was the leading growth sector. Id argue now perhaps its IT/comms as that is where ideas/growth are distributed rather than railroads as weve moved from manufacturing to services based economy (in the western world anyway - could still be true for emerging markets/BLOC who are growing by building shit like USA was when Dow theory was first formalised)

 

my $0.02