I keep hearing that the SPX is one of the hardest assets to time and that it is much easier to time individual stocks. Theoretically this makes little sense since the SPX is much more liquid and like currencies are hard to manipulate for extended periods of time (i.e. their long term trends are stronger). Thoughts?
SPX itself is an index. It is not tradable. (You said "asset"). Did you mean SPY (the ETF) or S&P futures?
SPX responds to its components. The components may move before SPX and vice versa. When you see a major component, an example might be XOM, make a big move over say a week's time but SPX moves relatively little, or perhaps a little in the opposite direction, a divergence is created. You can reasonably expect in a case like that SPX will catch up with XOM and soon move in the same direction. Similarly, if SPX made a move not reflected in XOM, you might reasonably expect XOM to follow. If you plot XOM and a few other major components of SPX along with SPX on the same chart, the results could be enlightening, and might tip you off in advance to moves in the SPX components or in SPX, depending on which components are leading or lagging the SPX. Most of the time, of course, SPX moves in consort with its major components. But there are enough total components that occasionally one of the major components can lead or lag. That may create a trading opportunity. Although you can't trade SPX directly you could trade an ETF like SPY, or a future like ES that closely mirror SPX.
I see. Would this divergence be considered a market inefficiency? I'm surprised that the market wouldn't arbitrate it immediately!
Hmm..... Looks like #2 is the full S&P futures ($250 per S&P point). #4 is the e-mini S&P futures ($50 per S&P point).
It's often immediate, but other times not, and it may take a few days or even a few weeks for divergences to resolve. Another interesting pair to follow is for example crude and Exxon. Naturally you'd expect Exxon to go up as crude prices rise, but if you plot crude versus Exxon you will be able to identify a number of places were crude made an obvious move before Exxon. As a trader you could exploit that. Same with the indexes and their major components. I also like to follow TLT which is long term treasuries, and TNT which is the ten year. These can tip you off to upcoming moves in the indexes. In real life, markets are inefficient in the short term and only tend toward efficiency in the longer term. I agree with Soros who says markets don't reflect reality but are virtually always biased one way or the other. In other words, markets are nearly always divergent from reality.
SPX is not the hardest to time, it trades fairly geometrically, you just need to use the appropriate analysis. SPX is manipulated all the time by huge institutions, they use futures and/or "programs" on stocks to get their agenda done. If I were you I wouldnât worry about it unless youâre a daytrader and want to know the order flows and the games they play. It also depends on what is your definition of "manipulation".