Hi. This is under construction.
I’m attempting to learn to predict and understand the S&P 500 by teaching others about it. This morning I made about $1000 on one of my first trades ever. This is is written in part from my own philosophy, building on other's ideas. I like an article I read from 2008 and wanted to revive and improve it over time.
I’m attempting to learn to predict and understand the S&P 500 by teaching others about it. This morning I made about $1000 on one of my first trades ever. This is is written in part from my own philosophy, building on other's ideas. I like an article I read from 2008 and wanted to revive and improve it over time.
The S&P 500 or Standard and Poor’s 500
is an index based on the 500 leading companies publicly traded in the U.S.
stock market. It gives investors an idea
of the overall movement in the U.S. equity market. It doesn’t move as
drastically or make volatile jumps generally because of the large number of
companies it takes into account all at once.
It is considered a good representation of how the market and
U.S. economy is doing in general. There are a lot of good ways to predict how
it’s going to change but I want to simplify it for myself and others.
As of this writing, the S&P 500 accounts for about 1.6
Trillion USD of assets, and that number is divided by a certain number close to
8.9 billion. Hence the value of the S&P 500 will be somewhere around 1700
if you look it up.
Methods of predicting
the movement of the market:
General Trends. A bull market is when the stock price of most
companies are rising and a bear market is when most are trending toward decline
in price. This is one of the simplest ways of predicting where it will go in
the next short period of time. Look for news in general that would affect
investors. Most often investors will pull out of the market temporarily when
they feel like a big news announcement will have an uncertain but profound
effect on the market. Once they think they “know” what the news is and how it
will be received, they will jump back in or pull out more in order to get the
largest benefit from a large market movement in either direction.
Industry Specific.
If you click on constituents, you can see some of the top
factors in the index, but it is much more effective to break it down into
groups. If you want to focus on the constituents from one industry, click
sector breakdown, then select which industry, then click constituents. It
usually best to focus on larger groups first as they have a bigger impact on
the general direction of the market.
After you’ve looked at the general trend, you can look at
the sector breakdown and make a smaller generalization about what’s going to
happen. Information Technology makes up almost 18% of the S&P 500, and you
can click on that and see it includes Apple, Microsoft, Google, IBM, Intel, and
so on. If you know there is something going on that will affect all of them
related to technology, you might be able to predict a rise or fall in the total
S&P 500.
Remind yourself that in an index, this is most likely
secondary to general trends. If the movement you foresee in the general trend
and the industry trend are the same, you can start to become more confident
that you have the right idea.
Generally industry movements balance against each other
unless a major competitor suffers a major loss or bankruptcy because they are
competing in the same market. If the market itself enlarges or shrinks, that
would be something to take into account.
Earning Quarters and
Expected Earnings
Most companies report their Earning Per Share (EPS) and
Revenue quarterly. If the report is as expected or better, this will boost
their share price. If it is worse than
expected, or if the company issues a guidance (expected value) that is negative,
you will see a drop in their share price. If you are looking at investing in a
specific company, this is always significant. BUT, when you are looking at the
entire index, this might only be relevant if the entire industry shows a
similar trend. If most companies have positive earnings, more investors will be
willing to put in money and the S&P will rise.
Take Overs and
Mergers
If a company is being taken over for a price higher than its
value, this will boost it’s share prices and lower the share prices of the
company taking it over. If a competitor is being bought out and is expected to
die, the opposite effect on share prices may be true. The best way to predict
how this will affect the industry and then market is to read about what is
expected to happen after merger. If the company is acquiring something that is
expected to increase their revenues in the near future, their share price will
rise as well.
Market Expansion,
Innovation, New Product Announcements, New Major Contracts, and Government
Orders
There are many announcements that will increase share
prices. These also include successful clinical trials, or a market growing due
to fads or seasonal factors. Don’t assume you know how seasons affect an
industry. Look at past trends during months where similar events occurred if
possible.
If on the other hand, a company fails to get a contract, or
the announcement is poorly received, share prices will fall.
Other Factors
Share Buy-back. If
a company buys back its own shares, it is seen as confidence from the company
and a confidence booster for investors. This will help maintain or increase the
share price.
Dividends. An
announcement of a dividend will increase shares by an amount close to the dividend
per share and on the ex-dividend date it will lower shares because anyone
buying on or after the ex-dividend date are not entitled to a dividend.
Stock Splits. Some
claim this increases the share because stock prices are cheaper per share, but
in theory it has no effect. In general don’t go off of small possibilities.
Insider Trading.
If a COO, CEO, CFO, Chairman, board directors, etc (who have firsthand info
about what is going on) buy or sell stock, it may herald some upcoming good or
bad news. They may however be cashing in
their compensation benefits, and nothing is actually going on with the company.
Don’t assume you know what’s going on. If it turns into a big deal in the news,
you can always ride on that for a short while, but that is assuming you can
stay ahead of the news of getting to the bottom of what’s actually happening.
Investment
Gurus/Analysts/Hedge Funds trading. Investment decisions and advice of
revered individuals such as Warren Buffet, George Soros, or revered analysts
are closely monitored by investors and will therefore move the market. Its good
to find out who these people are so you don’t miss a major indicator.
Inclusion/Removal from
Stock Index. Inclusion or removal of a company’s stocks from an index may
increase or decrease the value of shares for that index or even that stock if
it is seen as a sign of being valued more or less.
Miscellaneous.
Possibly the most abstract part of trading. Trading involves interpreting how
news about technology, patents, war, disasters, lawsuits, or even revelations
about the leader of a company or politician and its ties to a stock or index will
affect the market.
Sources:
My own interpretations and philosophy.
My own interpretations and philosophy.
http://www.articlesbase.com/investing-articles/the-10-factors-that-affect-and-predict-stock-prices-617610.html
