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5 Key Indicators to Understand the S&P 500 Performance

5 key indicators to understand the s&p 500 performance

The S&P 500 has long been touted by many investors as the benchmark index that measures the overall performance of the US economy. The benchmark index used to be the Dow Jones, however the Dow Jones (DOW) only represents 30 of the largest companies, whereas the S&P 500 represents 500 companies across 11 different industries.

The fact that the S&P 500 represents so many stocks across so many industries makes it an effective benchmark index for most investors. Many hedge funds even struggle to beat the returns given by the S&P 500, showing that the S&P 500 index has held its ground consistently for years, and can serve for many as the baseline indicator about how much profits an investor can reasonably expect over a given year.

As the S&P 500 is so expansive and covers so many industries, it may be tough for beginners to understand the S&P 500 performance at any given point. For example, if we were to take the price of each stock listed in the S&P 500 today, then we would not achieve a price of around $3,800, which is the current price for the S&P 500 right now. So, this article will go through 5 key indicators that will help investors understand the S&P 500 performance.

1 Taking a look at the S&P 500 performance map

Many different websites can display an S&P 500 performance map, and all of them should display roughly the same information. Looking at an S&P 500 performance map can help investors spot which industries are struggling, and which industries are gaining value over a certain period. For example, if you look at a YTD performance map, you can see that the energy sector has been doing extremely well, even amongst the overall poor performance of the stock market this year:

YTD S&P 500 performance map

YTD S&P 500 performance map. Via [Finviz]

Although there is no certain way to explain why the energy sector has been performing so well this year, many people attribute the great performance of the energy sector to the war between Russia and Ukraine, causing trade embargos with Russia and therefore a sudden shock in global oil supply. This according to many experts, caused the prices of oil and gas to skyrocket, enabling many oil and gas companies to profit from this and increase their stock prices.

2 Volume 

Most stock charts will display the volume bars/candles at the bottom of the chart.

Most stock charts will display the volume bars/candles at the bottom of the chart. Via [Yahoo Finance]

Volume is another key indicator that can help an investor track the performance of the S&P 500. Volume represents the total number of shares traded over a certain time. This is a key indicator because it helps investors see if there is activity in the index, and therefore activity in the stock market. Large whales may be reluctant to place large trades, if not enough volume is present. The less volume there is, the higher the chances of a trader experiencing slippage when executing a trade.

An important note to mention is that green bars doesn’t mean that there were more buy orders than sell orders, and inversely red bars doesn’t mean that there were more sell orders than buy orders. Trading volume represents both buy and sell orders, so the color of the bar just represents the direction of the index price during that time period. In the example above, we have used a 4-hour time period between each period.

3 RSI

Relative Strength index.

RSI Indicator for [SPX] S&P 500 Index. Via [MarketWatch]

The RSI stands for the Relative Strength index. It is one of the most popular technical indicators used by traders. The beauty is in the simplicity of the RSI, as it is an indicator that helps a trader determine when a certain stock or security is either overbought or oversold. If the RSI is above 70, then it is considered “overbought”: this means that the price has moved up too quickly, in an unsustainable fashion. If the RSI is under 30, then it is considered “oversold”: this means that the price has moved down too quickly, in an unsustainable fashion. Of course, the RSI is only one of many technical indicators. The S&P 500 can remain overbought for months, just like it can remain oversold for months. It is not because the S&P 500 is currently oversold that it is a good idea to sell, and it is not because the S&P 500 is currently overbought that it is a good idea to buy. The RSI is one of many technical indicators that can help a trader make a better decision.

4 Fear and Greed index

Fear & Greed Index

Fear & Greed Index. Via [CNN Business]

The Fear & Greed index is measured differently from institution to institution, but the baseline idea is the same: it tries to measure the current sentiment of the markets.

If many people are selling and remaining cash-heavy, that is a solid indicator that people are fearful and believe that the stock market might drop even further. On the flipside, if people are taking insane amounts of margin and leverage, keeping as little cash as possible in their accounts, then the markets are greedy as people believe that markets will go even higher. 

When using this indicator, it is always nice to remember the wise words of Warren Buffett: “Be fearful when others are greedy, and greedy when others are fearful”. Indeed, the best time to invest is generally when everyone has capitulated, and the best time to sell is when everyone is extremely bullish, thinking that stocks can only go up. Remember that nobody can time the markets perfectly, therefore having a long-term horizon on investments can yield better results than trying to perfectly time the markets. As some people say: “time in the market beats timing the market”.

5 Federal interest rates

Many investors and analysts notice a negative correlation between Federal interest rates and the price of the S&P 500. As federal interest rates rise, investors may want to switch their stock investments into bond investments, as bond investments will now yield a better return than before.

This raising of interest rates can effectively drain the amount invested in the stock market, therefore performing a decline in the price of the S&P 500. Of course, this may not always be the case, although it has been the case in recent history. Another chart can help us show this:

Fed Funds and Stock Relationships

Fed Funds and Stock Relationships. Via [Selections & Timing]

Therefore, observing the rise (or fall) of the Federal interest rates is a great indicator to help determine the relative performance of the S&P 500

Conclusion

There are so many indicators that can help an investor track the performance of the S&P 500. We have mentioned five in this article, but there are many more that exist.

Any investor should not rely on a single indicator in order to make a sound investment decision, but rather on a multitude of indicators. Since there are so many indicators, it may be best for you to find indicators that work for you and help you make a sound investment decision.

There are multiple paths to riches in the stock market, after all, and therefore it may be wise for an investor to use investment techniques, indicators and strategies that he is comfortable using. So, which indicators do you use in order to track the performance of the S&P 500?

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