Why are U.S. Indexes so coupled?

[pianodoctor]

I've had a few general investing questions in the back of my mind lately that could be put up for general discussion- wasn't sure how to categorize them for iTulip purposes- so finally I figured I'll just make them "Ask iTulip".

Q1: I have observed such an incredibly tight correlation between the Dow and the S&P500- whether on an intraday minute-by-minute basis, or short, intermediate, or long term. It's incredible how they track each other. Like, if you wanted to do that on purpose, you'd think it would be impossible- but there it is. It's almost as if no one is doing anything other than trading index funds. Is that what's going on? If not, what?

I'll make separate threads for my other questions.

[pianodoctor]

Re: Why are U.S. Indexes so coupled?

51 views so far and no responses- and I thought I was the only one here who didn't know the answer!

[Chris]

Re: Why are U.S. Indexes so coupled?

I once heard that the DAX futures were at one stage a strong predictor of the US stock indices. Figure that one out...

[Spartacus]

Re: Why are U.S. Indices so coupled?

Arbitrage, diversification, automated transacting, derivatives, leverage.

everyone can afford the computers, networking and especially the expensive link ups (data feeds from exchanges & trading houses, and automated fulfillment accounts at trading houses) to do the type of arbitrage only the big boys could afford 15 years ago.

Remember the Kevin Spacey character in "Working Girl" ?

What he did you used to be only able to do with expensive data feeds & (even then) fairly expensive computers.

Anyone can now do it from Outer Podunk or Deepest Borneo, or from a Mexican out-house. When I was in India 2 years ago I saw faster, cheaper networking setups in rural villages than I can get at a reasonable price in Toronto. Here, the ISPs are finding ways to limit my use. Traffic shaping, monthly volume limits (coupled with threats of cancellation).

There, it's the complete opposite. the ISPs are offering more and more, at cheaper and cheaper prices.

If they want to arbitrage DOW & nasdaq & s&p of course they'll have to pay the US dollar signups for those services from the appropriate brokers, so that will be expensive for them, but with millions able to do it, how many are?

I've had a few general investing questions in the back of my mind lately that could be put up for general discussion- wasn't sure how to categorize them for iTulip purposes- so finally I figured I'll just make them "Ask iTulip".

Q1: I have observed such an incredibly tight correlation between the Dow and the S&P500- whether on an intraday minute-by-minute basis, or short, intermediate, or long term. It's incredible how they track each other. Like, if you wanted to do that on purpose, you'd think it would be impossible- but there it is. It's almost as if no one is doing anything other than trading index funds. Is that what's going on? If not, what?

I'll make separate threads for my other questions.

[Spartacus]

Re: Why are U.S. Indices so coupled?

the answer above,

OR

"they're correlated out of sheer perversity & spite"

See also my thread in Rant & Rave "nervous about all assets, including precious metals"

http://itulip.com/forums/showthread....hlight=nervous

I've had a few general investing questions in the back of my mind lately that could be put up for general discussion- wasn't sure how to categorize them for iTulip purposes- so finally I figured I'll just make them "Ask iTulip".

Q1: I have observed such an incredibly tight correlation between the Dow and the S&P500- whether on an intraday minute-by-minute basis, or short, intermediate, or long term. It's incredible how they track each other. Like, if you wanted to do that on purpose, you'd think it would be impossible- but there it is. It's almost as if no one is doing anything other than trading index funds. Is that what's going on? If not, what?

I'll make separate threads for my other questions.

[pianodoctor]

Re: Why are U.S. Indexes so coupled?

Thanks for the responses, Spartacus. The second response is a somewhat different issue, I think. The correlation I mean is the way every dip and peak is followed between U.S. indices, minute by minute. For instance, goto the marketwatch.com page and toggle between the live charts of the Dow, S&P, and NASDAQ.

Your first response is interesting, though since I am a retail investor rather than a pro trader, I don't really understand how the sophisticated stuff works. So it's a bit over my head. But I figured it can't be as simple as the whole market is just trading a few Index ETFs. Same effect though!