S&P 500 Cash cannot be traded it is a calculation of the stocks in the S&P 500 weighted based on Market Capitalization. You can see the changes in the companies listed here (yes I linked to wikipedia, something I am not proud of).
Many people use the S&P 500 Cash against S&P 500 futures. What generally happens is the the spread between the markets tightens as the futures get closer to expiration.
My issues with same market, big picture analogs.
- Measuring Tools: In the case of the S&P 500 Cash, the weights and the names of stocks have changed and some industries are weighted differently. Different inputs means different output and when the inputs are dramatically different we see dramatically different outputs.
- Discounts Experience: A chart is a convenient way to discount experience. For example, pick a day that we saw a big move in the market. If you had not actually seen it happen you may be lacking context. Yes the market did x, but a,b,c also contributed to it. That is why we see a pattern happen 3 times in a row but the 4,5,6 time it fails because there was different context.
- Probability: What are the chances of the content/context to be the same over time, with different people, and different stocks. There are times when the market was not so sensitive because of high participation but we are not in those times.
I am not against all analogs, I think Erick of Market Anthropology does some great cross market analogs. Patterns do appear over and over again but it requires time. It is easy to say that this time is different and even if the context is different the results can be the same. But it is much more unlikely.
Other reasons for change.
- Financial Information: The way we consume, distribute, and volume of information has changed significantly. That cannot be discounted. Self fulfilling prophecies are less frequent because there are more “Selfs”.
- Economy: We are in a very different economy right now than earlier. This effects participation and the way they participate. There are more people in the market that can “afford” to lose than in 2008.
- Government Intervention: We still do not know how QE will end. There are still people waiting for the world to end. It is very possible but it just is not happening yet. The more time that passes the more time to accumulate participants. Dood-Frank has also significantly changed market structure.
There are a lot of variables swirling around but the powers that be are choosing to keep the trend going. Much of it has been fueled by short sellers and maybe their capitulation means the top.
To generalize what has happened in the market over the past few years, we have retraced at obvious resistance. We have had moments when we have been in ranges, some more violent than others. You can make money on both sides but selling and buying breakouts has been difficult. A lot of moves have been happening overnight. If I had to guess an analog for the S&P 500 it might be gold, a strong uptrend despite things collapsing around them.
When the market gets to a place it has not been ever or for a long time we are all rookies. We need to see a time when support becomes resistance for an extended period of time.
The question I always ask, who wins if we have a significant break? Things always end badly but there has to be significant profits to be made. It is one thing to bet that your neighbors house will burn and quite another to set your own house on fire.
I cannot answer where the S&P 500 will go but either can the chart.
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