Technical Analysis S&P 500
About S&P 500 IndexThe S&P 500 Index is an American stock index, one of the largest in the United States. It includes securities of the 500 largest issuers with the largest capitalization, traded on the US stock exchanges.
Interestingly, despite its name, the index includes 505 stocks, but there are exactly 500 issuers in it. The companies included in it belong to a wide variety of areas of the economy, from healthcare to industry, which allows us to evaluate the American economy as a whole.
S&P 500 futures are offered by the Chicago Mercantile Exchange (CME). Thanks to the electronic trading of the GLOBEX system, you can trade from Monday to Friday. There is a break in trading only for an hour every day from 00:00 to 1:00. At this time, the index data is recalculated and updated.
The index was created by the efforts of Standard & Poor's, its publication began on March 4, 1957. It is now part of the S&P Dow Jones U.S. family of indices. and is a true barometer of the entire American economy. It can also be used as a leading indicator characterizing American GDP.
The S&P 500 appeared much later than the first stock index (the Dow Jones was created in 1896), but it was he who became the main indicator of the American stock market.
In the calculations of Standard & Poor's, they not only average the price of shares, but also assign a certain "weight" to each security. "Weight" depends on Free-Float, that is, on the volume of shares in free float. In other words, if a company is the S&P 500 leader in terms of market capitalization, this does not mean at all that it will be assigned the largest share in the weight of this index.
The total (cumulative) market capitalization of all corporations included in the S&P 500 index is more than 23 trillion USD. This value corresponds to 70% of the market capitalization of the entire American stock market.
The S&P 500 index basket includes companies operating in all sectors of the economy. At the same time, the IT sector accounts for more than 20%; the healthcare, finance and communications sectors are also among the leaders. The weight of the IT, healthcare and communications sector is around 50%.
There is a wide range of companies' capitalization. The leaders in the basket have a capitalization of over $ 1 trillion, while the capitalization of the smallest company does not even reach $ 1 billion. The median capitalization fluctuates around $ 16- $ 17 billion.
The composition of the basket is not a static value; rebalancing is performed at least 4 times a year (quarterly). Changes in the composition of the S&P 500 may occur in March, June, September and December.
Applicants for inclusion in the S&P 500 index pass a fairly tough selection. The following conditions must be met:
- A month before the company is appraised, within six months, the monthly trading turnover must exceed 250,000 stock;
- The ratio of the annual traded volume in dollars to the market capitalization of the company must be at least 1;
- The company must be American;
- Regular public companies listed on US trading floors, as well as REITs are eligible for inclusion in the index;
- The company should have a market capitalization of $ 4.1 billion;
- The “weight” of each company is taken into account in order to prevent a strong bias towards one of the spheres of the economy;
- The restriction for companies that have recently undergone an IPO has been removed, from April 4, 2019, such shares are considered on an equal basis with others.
The volatility of this instrument has always been at an average level. Over the past 20 years, only a few times the daily volatility has exceeded 100 pips. Most of the time, volatility was about 20-50 points.
The all-time record was set in March 2020, when stock markets across the planet began to fall due to the pandemic. On this day, the S&P 500 index showed volatility over 300 points.
As for the calculation, the standard formula "weighing" the company by capitalization is used:
For each company, the product is calculated the value of a stock by the number of freely available securities (free float - those securities that can be bought on the stock exchange);
The results are summed up and the resulting number is divided by Divisor - the coefficient selected during the development of the index.
The calculation of the S&P 500 index value is carried out according to the formula:
- n - 500, the number of companies in the index;
- P - is the company's share price;
- N - Free-Float, how many shares are in free circulation, anyone can buy them on the stock exchange;
- Divisor is a synthetic coefficient; when developing the index, it was selected in such a way as to get the S&P 500 value equal to 10.
The S&P family includes many indices. In addition to the main one, the most famous and used ones include:
S&P MidCap 400 - is an index based on 400 US mid-cap companies.
S&P SmallCap 600 - is an index of 600 low-cap American issuers.
The S&P 1500 - is a general index that combines the two above, as well as the S&P 500.
The S&P 100 - is an integral part of the S&P 500, which includes the 100 largest and most reputable companies from it.
S&P Total Return - is an index of total return that takes into account dividends paid by issuers included in the S&P 500.
S&P Europe 350 - is a stock index of 350 large European companies.
S&P/ASX 50 - Australian stock market index.
S&P Asia 50 - is an index of securities of issuers that have been listed on the exchanges of Hong Kong, South Korea, Singapore and Taiwan.
S&P Latin America 40 - is an index that includes stocks of 40 companies from Brazil, Chile, Colombia, Mexico and Peru.
S&P/TOPIX 150 - is a regional stock index of the Japanese market.
S&P/TSX 60 - is an index of 60 large companies listed on the Toronto Stock Exchange.
S&P Global 1200 - is a global index from Standard & Poor's, calculated on the basis of stock prices of 1200 issuers from 31 countries of the world. Includes 6 of the aforementioned local indices and the S&P 500 itself.
In the S&P family, in addition to global and regional indices, there are also sectoral and other types of indices, the total number of which exceeds 100.
How to make money trading S&P 500 futuresS&P 500 futures were launched in the early 1980s. This method of working with an index is more suitable for active trading than working with stocks of ETF funds. Another feature of futures is the ability to work with leverage.
S&P 500 options are traded on the Chicago Board Options Exchange (CBOE). There are also options on the shares of the ETF of the SPDR S&P 500 fund. In total, there are 5 types of options on the S&P 500 index on SVOE.
As for the trading methodology, the principle is the same as in the case of investing in ETF funds:
- Open an account with a broker that gives access to the appropriate platform;
- Buy a futures or an option on the S&P 500 index;
- Hold the contract until the expiration date or engage in active intraday trading.
In addition to working with leverage and the ability to work intraday, futures are also good because they have much higher liquidity than ETF shares.
So, in the description of the S&P 500 futures on the CME it is said that the daily liquidity for futures is 8 times higher than that of all ETF funds (including SPY, VOO, IVV).
Investing in the S&P 500 with ETF FundsETFs (Exchange Traded Funds) are exchange-traded funds that buy stocks from an index basket at an exact ratio. In this way, funds copy the index basket and list their shares on the stock exchange. When you buy a stock, you get a whole portfolio of stocks that copies the index.
If you yourself bought at least 500 shares of different companies without taking into account the weight (distribution by quantity), then you would need more than 45 thousand dollars. And one ETF share of the fund can cost $ 50-250, while the percentage yield will be the same.
Let's list the ETFs that copy the S&P 500.
The SPDR S&P 500 (SPY) copies the benchmark with high accuracy (the benchmark is the base on which the ETF is created, in our case it is the S&P 500).
This index fund was created on January 22, 1993 and manages over $ 300 billion and is issued by State Street Global Advisors. In terms of structure, it is UIT (Unit Investment Trust - Investment Trust).
iShares Core S&P 500 (IVV). It has existed since 2000 and is essentially the same as SPY, but the issuer was BlackRock.
Vanguard S&P 500 (VOO) is a fairly young fund, launched only in 2010. The issuer is Vanguard. The principle of operation is the same as in the previous 2 - copying the S&P 500 index with high accuracy.
ProShares Trust PSHS Ult S & P500 (SSO). This fund is interesting in that it works with leverage, doubling the movement of the index. If the S&P 500 rallies 2%, the fund shares increase in value by 4%, and losses also increase proportionally. The issuer is ProShares.
There are inverse or mirror funds that rally when the S&P 500 falls and vice versa. They are usually used for insurance.
As an example, let's take ProShares Short S&P 500 (SH) and ProShares UltraShort S&P 500 (SDS), the latter works with leverage, that is, it scales the movements of the S&P. The issuer for both funds is the same - ProShares.
There are other index funds that copy the S&P 500.
As for the purchase of securities directly, you can purchase ETF shares through a broker.
Investing in the S&P 500 through ETFs instead of buying futures is a great medium to long term investment option.
Features of investing in ETN on the S&P 500 indexETN (Exchange Traded Notes) is a stock exchange note, in simple words, it is a receipt (analogous to a bond). By investing in exchange-traded notes, the investor seems to lend money to the company that issued the notes.
Examples: iPath S&P 500 Dynamic VIX ETN (XVZ), iPath Series B S&P 500 VIX Mid-Term Futures (VXZ), iPath Series B S&P 500 VIX Short-Term Futures (VXX). Exchange-traded notes are quite actively traded on the Tel Aviv Stock Exchange (TASE).
As for the release and distribution of ETNs, the step-by-step process looks like this:
The issuing company sells the notes to a dealer or goes public with its own product;
Traders buy this product in the same way as regular bonds, effectively lending money to the seller of the notes;
ETN has a maturity date. At the end of this period, note holders receive an amount equivalent to the current value of the S&P Index.
So far, ETFs have outperformed ETNs in terms of reliability. The scenario with the bankruptcy of the issuing company is unlikely, but if possible, it is better to give preference to ETF. Consider the low liquidity on the ETN market.
The S&P 500 characterizes the state of the US economy, which means that it is the most important stock index on the planet. This is a highly liquid instrument, and given the scale of the American economy, it will remain in demand in the future.