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What makes a index move


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I have a interesting question. If the DAX is a index of 30 companies and the DAX chart plots the prices for these 30 companies then why do we get interesting patterns on the DAX like double bottoms, double tops, trendline breakouts etc. I would have thought the DAX charts would not respect technical analysis as prices would just make swings all over the place and not respect technical setups. Many times I have seen price bounce off 00 levels. Do people trade the DAX which then affects the stock price or do people trade stocks which then moves the index?

If the 30 companies in the DAX move the index then can someone please explain why on the chart of a DAX or any index,  when we get a double top or a double bottom,  why does the price go in the opposite direction.  What is actually happening to the prices of the stocks that move the index when we get these setups?

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"

Big Trades

Trading in ETFs usually accounts for about a quarter of the daily volume in U.S. stock markets, but that can leap to nearly 40 percent on some days. These spikes typically coincide with surprise events or policy changes"

 

https://www.bloomberg.com/graphics/2018-growing-etf-market/?srnd=etfs

 

"

'Big Short' investor Michael Burry is calling passive investment a 'bubble.' He's not the only finance luminary sounding the alarm."

 

https://markets.businessinsider.com/news/stocks/investors-that-have-spoken-out-against-passive-investing-2019-8-1028485512#carl-icahn1

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1 hour ago, Seyyub said:

I have a interesting question. If the DAX is a index of 30 companies and the DAX chart plots the prices for these 30 companies then why do we get interesting patterns on the DAX like double bottoms, double tops, trendline breakouts etc. I would have thought the DAX charts would not respect technical analysis as prices would just make swings all over the place and not respect technical setups. Many times I have seen price bounce off 00 levels. Do people trade the DAX which then affects the stock price or do people trade stocks which then moves the index?

If the 30 companies in the DAX move the index then can someone please explain why on the chart of a DAX or any index,  when we get a double top or a double bottom,  why does the price go in the opposite direction.  What is actually happening to the prices of the stocks that move the index when we get these setups?

Hi, an index is designed to mimic or track a basket of companies but won't do that 100% in real time as an index is a market unto itself with it's own market participants who will drive price up or down irrespective of the basket companies. So neither actually drives the other and so you get index traders responding to index chart patterns and structure regardless of what the basket is doing. Imbalances between index and basket will occur from time to time but will eventually work itself out.

It's the same for ETFs that are designed to mimic or track an index, they are their own market and price will swing according to the actions of that market's participants rather than the index the ETF is based on.

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2 hours ago, Caseynotes said:

Hi, an index is designed to mimic or track a basket of companies but won't do that 100% in real time as an index is a market unto itself with it's own market participants who will drive price up or down irrespective of the basket companies. So neither actually drives the other and so you get index traders responding to index chart patterns and structure regardless of what the basket is doing. Imbalances between index and basket will occur from time to time but will eventually work itself out.

It's the same for ETFs that are designed to mimic or track an index, they are their own market and price will swing according to the actions of that market's participants rather than the index the ETF is based on.

Thank you. So when people trade a index are they trading based  on the macro news and the news of the highest weighted companies in the index?

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6 hours ago, Kodiak said:

Big Short' investor Michael Burry is calling passive investment a 'bubble.'

He's got several decades of evidence against him.  Anyway, all financial speculation is ultimately a 'bubble' in the sense that it is prone to overbuying and overselling.  Yawn, yawn, yawn.

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14 hours ago, Seyyub said:

Thank you. So when people trade a index are they trading based  on the macro news and the news of the highest weighted companies in the index?

That's correct, an index is a general gauge of the health of a country's economy if the basket contains the largest companies overall or sector performance if it's a specialist index.

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14 hours ago, dmedin said:

He's got several decades of evidence against him.  Anyway, all financial speculation is ultimately a 'bubble' in the sense that it is prone to overbuying and overselling.  Yawn, yawn, yawn.

As long as the bullmarket keep grinding higher all is well

But in a bearmarket when "everybody" will sell funds and sell bull ETF and buy leveraged bear ETF then we will see how it plays out?

Probably some change in regulation and ban on shortselling?

"“In the Russell 2000 Index, for instance, the vast majority of stocks are lower volume, lower value-traded stocks. Today I counted 1,049 stocks that traded less than $5 million in value during the day. That is over half, and almost half of those -- 456 stocks -- traded less than $1 million during the day. Yet through indexation and passive investing, hundreds of billions are linked to stocks like this. The S&P 500 is no different -"

"but the exit door is the same as it always was."

https://www.bloomberg.com/news/articles/2019-09-04/michael-burry-explains-why-index-funds-are-like-subprime-cdos

 

 

 

 

 

 

 

 

 

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  • 3 months later...

"Vanguard Group, the $5.1 trillion money manager, said this week that starting on Jan. 22 it will stop selling the ETFs, which use complex financial engineering to amplify market returns, using a concept known as "leverage." In addition to banning the the so-called leveraged ETFs, Vanguard will also halt sales of "inverse ETFs," which use similar financial-engineering techniques to provide investors with fat gains whenever stocks fall."

 

https://www.thestreet.com/markets/triple-x-etfs-now-taboo-at-vanguard-as-regulators-look-other-way-14830195

Why now? 😰

Edited by Kodiak
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On 03/11/2019 at 14:09, Caseynotes said:

Imbalances between index and basket will occur from time to time but will eventually work itself out.

I think imbalances are very rare and very quickly resolve themselves. Classic arb setup to buy the index and sell all of the constituents etc.

So now I am thinking....... the constituents with the highest beta should respond to technical patterns on the index chart?? Anyone ever looked into this?

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7 minutes ago, Bopperz said:

I think imbalances are very rare and very quickly resolve themselves. Classic arb setup to buy the index and sell all of the constituents etc.

So now I am thinking....... the constituents with the highest beta should respond to technical patterns on the index chart?? Anyone ever looked into this?

can't say I heard of anyone looking at that, indices can behave similar to individual constituent stocks in that they will occasionally get sweep up in over enthusiastic buying or selling and carried further (up or down)  than is warranted and need correct  thereafter.

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  • 3 weeks later...
  • 3 weeks later...
1 hour ago, Kodiak said:

"LONDON (Reuters) - The European Union's markets watchdog tightened rules for short-sellers on Monday in an attempt to calm stock indexes that sank again over fears that the coronavirus epidemic will tip economies into recession."

 

https://www.investing.com/news/stock-market-news/eu-watchdog-tightens-shortselling-rules-as-coronavirus-hits-shares-2111301

 

At this rate there will be nothing left to sell in a couple of weeks :(

 

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  • 2 weeks later...

"The Fed is going to buy ETFs. What does it mean?"

". Among other steps, the Fed said it would buy exchange-traded funds that track the corporate bond market, a first for the U.S. central bank."

"“All of this is to make sure that people who want to sell have a buyer,” explained Steve Blitz, chief U.S. economist for TS Lombard. “The Fed is taking both sides of the market so people who need to raise cash can do so.”"

"The Fed created this monster so it has to be on the other side of it now.”"

"As a second step, Rosenbluth and others think the Fed’s tiptoe may help calm parts of the ETF ecosphere, which has been rattled by record outflows, not just the bond market. "

 

https://www.marketwatch.com/story/the-fed-is-going-to-buy-etfs-what-does-it-mean-2020-03-23

 

 

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