This Is How To Trade The S&P 500 Now

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How to Invest in the S&P 500

Mike Genna
Contributor, Benzinga

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Index investing, also known as “indexing,” has been a popular form of passive management, closely associated with the idea that indexing can outperform most actively managed funds. Invest in the S&P 500 The idea originated with John Bogle upon the foundation of The Vanguard Group in 1974. A year later, the first index fund was born and began with just over $11 million in assets.

The product was a hit and became one of the most widely used financial products as the firm saw its index funds grow to an immense $4 trillion in assets today.

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What is the S&P 500?

S&P stands for Standard and Poor’s and the 500 refers to the number of companies present in the index. The 500 companies in the index are a combination of the largest stocks on the NYSE and NASDAQ. The index is a free float capitalization weighted index.

An index fund is a mutual fund that aims to benchmark itself against an index that resembles that fund’s strategy. It is always essential to read the fund’s objective and prospectus to identify the fund’s targeted benchmark.

So, instead of buying all the stocks in the S&P 500, you can simply invest into a fund that tracks its performance in coordination with the index. S&P 500 Index funds currently stand as one of the easiest ways to invest in anything and everything.

Why should I invest in the S&P 500?

Whether it be the overall market or certain sectors, it can be hard to decide what and where, geographically-speaking, you want to invest. This is exactly why you want part of your portfolio to have exposure to the entire market–for the best diversification.
The S&P 500 index is referred to on Wall Street when describing the overall movement of the equity in the economy.

It’s important to understand that not every market has identical characteristics, especially when it comes to regulations and politically motivated restrictions. For instance, if you are an emerging markets enthusiast and are looking to place an investment over a large umbrella of securities, it may be wise to avoid China due to an escalating trade war and a lack in regulatory transparency.

Investing in the S&P 500 eliminates most of this risk due to the fact that there is not a Chinese company present in the index.

A chart of the S&P 500’s performance over the last five years. As you can see, the index experiences slow, steady growth. Source: Finance.Yahoo.com

Steps to investing in the S&P 500

Now that you know a little more about the S&P 500, you can invest. Here’s how to invest in the index.

Step 1: Pick a broker

If you already invest with your favorite financial advisor or online brokerage you can skip this step. But, if you’re new to the investing world. You can do some research and choose what brokerage is best for you.

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There’s not a perfect broker, but it’s always important to know the advantages and disadvantages of each. For some tips, it would be wise to seek a brokerage that offers managers with no-load fees and low expense ratios. Not all brokerages have the same transaction costs, either. Make sure you do your research to see who can provide the most value, for the cheapest price.

S&P 500 Trading: How to Get Superior Returns To the Stock Market

In this video I’ll show you a tool that will help you in your personal quest to outperform S & P 500 Trading benchmarks.

S&P 500 Trading is considered the benchmark for market performance. If a fund manager can produce better returns than the S&P index, they’re considered a super star. Yet the vast majority of even professional traders fail to achieve that aim.

For this reason, many investors simply want to learn how to invest in S&P index fund and that’s fine. But what if you want to try for more?

Some learn how to trade S&P 500 options, thinking the extra leverage may help them.

In this video I’ll show you a tool that will help you in your personal quest to outperform S&P 500 Trading benchmarks.

Let me know if this video on S&P 500 Trading was helpful to you. Please leave a message in the COMMENTS section at the bottom of this page.

PLEASE “PAY IT FORWARD” BY SHARING THIS VIDEO & ARTICLE ON FACEBOOK OR TWITTER by clicking one of the social media share buttons above, or at the very bottom of this article.

VIDEO TRANSCRIPT

Welcome to this video on S&P 500 Trading. This one is very interesting. One of the most, really powerful things that I have come across and so let’s dig right in.

This is especially good for swing traders and ways to potentially outperform the S and P 500 which is the benchmark that most firms use and so forth. And of course as you probably know, very few people, very few funds outperform the S and P 500 index, so if you can do that, you are already in the top echelon of traders.

So here is one way to attempt to do that. No guarantees of course. But here is a way that, one technique that I use that works very very well for me. So take it, try it and here it is.

YOU CAN’T USE A NORMAL CHART IF YOU WANT TO OUT PERFORM THE STOCK MARKET

What we have here is a little bit of an unusual chart for most people I would say. And if you look over here, we don’t have any prices. We have percentages. And that’s because we are using a chart that is a percent change chart. So what it does is it starts, I have a start 90 days ago, so when I start on the left hand side of the chart. That’s 90 days ago, 3 months. And then of course it starts at 0.

I don’t know if you can see that. Really thin yellow line, but that starts at 0, so it, of course on day 1, it has 0 change. So then, as we begin, going after, the very first day that we begin, then it’s going to go above or below, and that tells us the percentage change that that market has had.

Okay, then we are going to compare, so anyway, you can tell as of this last day on the chart here, the S and Ps at 5.84 %, okay and that’s the black line. The black line on here is always going to be the S & P 500. Now, then I use another line, and I plot another market. In this case, it is the wrestle, the wrestle 2000.

USING PERCENT CHANGE IS THE KEY TO S&P 500 TRADING

We are comparing the percentage change between two markets. So here is the shift, and this is what we are looking for is the shift where now, again remember this magenta line, this purple line is the wrestle 2000, and it shoots above the S & P 500, and now it is, almost made twice as much money on a percentage basis than the S & P 500. 5%, 10%.

So that’s great, okay now that’s the easy way to read it, that’s the beginner’s way to read it, and not necessarily the best way. So you could look for simple cross of the two markets here. Alright, that’s one way.

A GREAT INDICATOR FOR THE SPX TRADING VIEW

Another way is to use an indicator like this, which is just a simple mathematical formula. It’s called the spread, or sometimes it’s called the difference, and all it does is it measures the difference between these 2 lines. So you make one as the major one and then the other as the secondary one. So what we are doing is, we are really in this case we are going to have all our charts the S&P 500 index.

That’s going to be our standard and we are looking for market that may outperform it. So we are going to have this line, have the dominant market be our comparison market. So if you look at this, what you see is that this line is going down down down down down down. And that means of course that are secondary market, the wrestle on this case is underperforming the S & P.

LOOKING FOR A “SHIFT” IN THE RELATIONSHIP BETWEEN THE S&P INDEX FUND AND ANOTHER MARKET

Then we are looking for a shift. So this will give us a little earlier reading potentially, where if we could draw for example, a trend line here, unless it breaks that trend line, get in there, and then potentially get in a little bit earlier here, instead of here. And that gives us more profits. We are getting in earlier.

Another thing that you can do is you can draw horizontal lines like this, gets you in about the same time at this point. Okay, so that’s all great. Gets in Just a little earlier. Now let’s compare with some other markets.

AN EXAMPLE OF HOW TO POTENTIALLY OUT PERFORM S&P 500 TRADING

So we could go through the major indices and go to the NASDAQ composite. Now here, again the black line is the S & P, the magenta line is the market we are comparing it to. In this case, the NASDAK composite. It’s underperforming. It’s only made 3.9% as opposed to 5.4%. And now you notice the difference line is just kind of going sideways. And it had gone up, now this looks weird.

The way we have to look at this is, that the spread, actually like calling this indicator the spread indicator. The spread between the 2 lines is that distance there which is, well bigger than that distance here. So if you would have bought here, you would have made more money than if you would have bought the S&P 500 at this time. Notice that if you bought the composite.

Even though the magenta line is still under the black, and that’s why, you know if you bought this, breaking this high here, or trend line here, you would have made money because that’s closing the spread, and therefore during this period of time, it’s catching up. Now this period of time, it’s losing ground again and that’s why this thing goes down. And the spread between the 2 lines is much bigger.

THE VARIABLES

So a lot, of it depends on when you get in, you get out, things are in flux, just like everything in the market. They are dynamic flux of up and down. And so it’s not always a long term strategy. It’s a Swing trading strategy. Which is holding overnight but for short periods of time.

Alright, let’s look at couple of other markets just out of interest. So now if we go down here, you can do this for example with, just deciding to what do I want to trade? alright, so for example right now, we have got great opportunities with currencies, but if you don’t want to trade Spot forex, you can always trade, and you can do this with Spot forex, you can do it with futures, you can do it, in this case with ETFs. So say well, maybe I want to invest in currencies.

IT’S ALL ABOUT TIMING IN THE STOCK MARKET

Well, probably not so much right now at least. Because here, again it’s all about timing, right. So here, here, here, here, here, it’s underperforming. That’s the magenta line, that’s the euro. That’s euro. And then it caught up, and then we broke that line, yes you would have made more money buying the euro, than buying the S & P 500. And then we get another shift again. Crossing of the lines here, breaking of the trend line here, and then you would be like, ‘ah no, don’t want to be in the Euro anymore, now I want to be back in and be doing S&P 500 trading.’

So how do we get some indication as to when that might occur. Well during this time, these markets are moving pretty much similar way. The S & P 500 and the emerging markets, and not seen by the spread indicator. Just kind of going sideways here. So what the opportunity is, we look for it again, the cross of the lines, but more specifically I like to look for this breakdown here, this support.

THE ALL IMPORTANT “SHIFT”

That’s the key. That’s where, okay, now we are getting a shift where in this case, the S & P 500 index is outperforming, and it’s going up a bit, but the emerging markets are going down dramatically.Then again, another breakdown occurring there. And that’s where you could go short.

To outperform the S&P 500 index, you don’t always have to be buying something that is doing better on a percentage basis. Being more bullish in other words. So you can get a little tricky and say, hey I am going to short markets that are going down more than the S & P is going up. And that’s another way to potentially, financially outperform doing the S&P 500 trading.

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The S&P 500 and How It Works

How the S&P 500 Tells You About America’s Health

The S&P 500 is a stock market index that tracks the stocks of 500 large-cap U.S. companies. It represents the stock market’s performance by reporting the risks and returns of the biggest companies. Investors use it as the benchmark of the overall market, to which all other investments are compared.

As of March 13, 2020, the S&P 500 has an average 10-year annual return of 7.99%.   S&P stands for Standard and Poor, the names of the two founding financial companies.

The S&P 500 was officially introduced on March 4, 1957, by Standard & Poor. McGraw-Hill acquired it in 1966. The S&P Dow Jones Indices owns it now and that’s a joint venture between S&P Global (formerly) McGraw Hill Financial, CME Group, and News Corp, the owner of Dow Jones. 

How the S&P 500 Works

The S&P 500 tracks the market capitalization of the companies in its index. Market cap is the total value of all shares of stock a company has issued. It’s calculated by multiplying the number of shares issued by the stock price. A company that has a market cap of $100 billion receives 10 times the representation as a company whose market cap is $10 billion. As of February 2020, the total market cap of the S&P 500 is $24.4 trillion.   It captures 80% of the market cap of the stock market.

The index is weighted by a float-adjusted market cap. It only measures the shares available to the public. It does not count those held by control groups, other companies, or government agencies.

A committee selects each of the index’s 500 corporations based on their liquidity, size, and industry. It rebalances the index quarterly, in March, June, September, and December. To qualify for the index, a company must be in the United States, have an unadjusted market cap of at least $8.2 billion. At least 50% of the corporation’s stock must be available to the public. Its stock price must be at least $1 per share. It must file a 10-K annual report. At least 50% of its fixed assets and revenues must be in the United States. Finally, it must have at least four consecutive quarters of positive earnings.

The stock can’t be listed on pink sheets or traded over the counter. It must be listed on the New York Stock Exchange, Investors Exchange, Nasdaq, or BATS Global Markets. 

As of March 13, 2020, the 10 largest companies, with a weighted market cap, in the S&P 500 were:

  1. Microsoft Corp.
  2. Apple Inc.
  3. Amazon.com Inc.
  4. Facebook Inc. A
  5. Berkshire Hathaway B
  6. Alphabet Inc. A (GOOGL)
  7. Alphabet Inc. C (GOOG)
  8. JP Morgan Chase & Co.
  9. Johnson & Johnson
  10. Visa Inc. A

The makeup of the S&P 500 industries reflects that of the economy.

As of March 13, 2020, the S&P 500 sector breakdown includes:

  • Information Technology: 24.4%
  • Health Care: 14%
  • Financials: 12.2%
  • Communication Services: 10.7%
  • Consumer Discretionary: 9.9%
  • Industrials: 8.9%
  • Consumer Staples: 7.2%
  • Energy: 3.6%
  • Utilities: 3.5%
  • Real Estate: 3.1%
  • Materials: 2.5% 

S&P 500 vs. Other Stock Market Indexes

The S&P 500 has more large-cap stocks than the Dow Jones Industrial Average. The Dow tracks the share price of 30 companies that best represent their industries. Its market capitalization accounts for almost one-quarter of the U.S. stock market. The Dow is the most quoted market indicator in the world. 

The S&P 500 has fewer technology-related stocks than the Nasdaq. As of June 28, 2020, 55% of Nasdaq allocations are in information technology compared to 24.4% for the S&P 500.   The Nasdaq also includes the stocks of companies that are privately-owned.

Despite these differences, all these stock indexes tend to move together. If you only focus on one, you will still be able to understand how well the stock market is generally doing. In other words, you don’t have to follow all three.

Milestones of the S&P 500

The following table shows various milestone events of the S&P 500, including both highs and lows, and other memorable moments. 

Date Close Event
Jan. 3, 1950 16.66 Record closing low, first close
June 4, 1968 100.38 First time above 100
Oct. 19, 1987 224.84 Black Monday
March 24, 1995 500.97 First close above 500
Feb. 2, 1998 1,001.27 First close above 1,000
Oct. 9, 2007 1,565.15 Highest close before financial crisis
Oct. 13, 2008 1,003.35 Largest % gain of 11.6%
March 28, 2020 1,569.19 New record high
Aug. 26, 2020 2,000.02 First close above 2,000
Sept. 21, 2020 2,929.67 New record high
Oct. 3, 2020 2,937.06 Highest intra-day
July 12, 2020 3,013.77 First close above 3,000
Feb. 19, 2020 3,393.52 New record high
March 12, 2020 2,480.64 Largest % decline since Black Monday, entered bear market

How to Use the S&P 500 to Make Money

Although you can’t invest in the S&P, you can mimic its performance with an index fund. You could also buy shares of stocks that are in the S&P 500.

Be sure to weigh the stocks in your portfolio according to their market cap, as the S&P does.

You should use the S&P 500 as a leading economic indicator of how well the U.S. economy is doing. If investors are confident in the economy, they will buy stocks.

Since the S&P 500 only measures U.S. stocks, you should also monitor foreign markets. That includes emerging markets like China and India. It may also be a good idea to keep 10% of your investments in commodities, like gold. They tend to hold value longer when stock prices drop.

Besides following the S&P 500, you should also follow the bond market. Standard & Poor’s also gives bonds credit ratings. When stock prices go up, bond prices go down. There are many different types of bonds. They include Treasury bonds, corporate bonds, and municipal bonds. Bonds provide some of the liquidity that keeps the U.S. economy lubricated. Their most important effect is on mortgage interest rates. 

The Bottom Line

Although the Dow is the most popularly known index, investors usually look to the S&P 500 when assessing how the overall stock market is doing. As such, this index is considered a leading U.S. economic indicator.

It tracks 500 publicly traded, large-cap U.S. companies. These businesses must meet specific criteria in order to be a part of the S&P 500. The mix of industries that make up the S&P 500 list often reflects the economic makeup of the United States.

Investors can purchase shares of stocks listed on the S&P 500 or invest in index funds that track the S&P 500.

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