A Review Of The S&P 500 Index

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Video Transcription:

Hello traders and welcome to the stock trading course and the second module stock market indices.

In this lesson, we’re going to review the standard and post 500 or the S&P 500. Which is actually the most utilized benchmark for the U.S. economy. So what is the S&P 500? The S&P 500 is a Nixon index of 500 stocks chosen for its market size, liquidity, and industry grouping. These 500 large cap stocks represent the leading stocks of the U.S. economy. This index is also designed to represent the risk versus the return associated with trading these large cap companies.

Now let’s break down the S&P 500 a little bit. The S&P 500 is market weighted. This means that every stock in the index is represented in proportion to its total market cap. For example, if the total market value of the 500 companies in the S&P 500 moves by +5%, the index will also move by +5%. And this also means that if we have +5% move in one of the biggest stocks in the S&P 500 will also move, not by 5%, but will also have a big move to the upside.


Now let’s look at the selection criteria for the S&P 500. The committee selects the companies in this index so they are representative of the industries in the United States economy. A company must satisfy these three liquidity base requirements in order to be considered to the S&P 500: the market cap has to be greater or equal than $5.3 billon, the stock has to have a minimum monthly trading volume of 250 shares in each of the six months leading to the evaluation date, and an annual dollar value traded to float, adjusted market cap greater than 1.0.

Now let’s have a look at some important companies in the S&P 500 by sector. In the consumer discretionary sector we have Amazon with a market cap of $243.55 billion. In the consumer staples sector we have Walmart stores with a market cap of $206.05 billion. In the energy sector we have Chevron Corporation with a market cap of $143.32 billion. In the financial industries we have Berkshire Hathaway with a market cap of $320.50 billion. In the healthcare sector we have Pfizer with a market cap of $196.37 billion. And information technology sector we have the biggest stock of the S&P 500 which is Apple with a market cap of $624.90 billion.

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Now we’re going to have a look at an S&P 500 chart and its corrective moves. So here is, basically, what the S&P 500 looks on a daily basis. Let me just zoom in on the chart so we can have a look at the entire index from 2013. Now you can see by this low at around November, December 2012, the index was at the 1341 level. Then we hit a massive boom market for the following years that let the index up to the 2120 level which it hit numerous times before this corrective move that we had a couple of weeks ago. Now let’s measure the corrective moves because it’s important to know that even though the S&P might move 9% to the downside, doesn’t mean that we have entered a barren market and it’s time for panic and it’s time for us to get rid of our long positions. Now let’s get this ruler and let’s look at this move from this high to this low. The S&P 500 moved -9.47% in 26 days.

Now this is what most analysts marked as the beginning of the barren market of the S&P 500, but as you can see here, we quickly recovered when we hit this important levels of support and we made higher highs until we started…until the index started to trade a very narrow range around the 20… 80, 2120 level. Now let’s look at this very strong move to the downside. Just look at these gaps on a daily basis. This was a very important move to the downside, and actually it was quite panicky because the S&P 500 would not stop selling off.

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So the S&P 500 moved -12.42% in 37 days from this high to this low. Let’s grab again the ruler and let’s go from this high to this low. And as you can see, we have 42 days of a down move from the all-time highs of around the 2132 level until we hit this bottom at around the same levels as the previous corrective move to the downside. As you can see right here, we haven’t had actually a new high, but it looks like a double bottom and this corrective move might be the impulse the S&P 500 needs to break with its all-time high at around the 3134 level.

So basically, this is what the index looks like and as you can see, while we do have some periods of correction to the downside, we are still in a very strong boom market, which means that the U.S. economy is looking very healthy and, of course, you should always follow the S&P 500 on a daily basis if you are trading stocks.

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