I have always believed that the indices trade very differently from the other futures markets. As a Turtle, we were given a choice as to whether or not we would trade the S&P 500 index. I made the decision not to trade the S&P 500 market using the Turtle rules, while many other Turtles did trade them.In another thread, in reference to PGO, a system developed by Mark Johnson, Chris Murphy wrote:I tested all 4 of Marks systems on 1 minute data from the S&P 500. None of them made a profit. I even tried fading the signals and the system still did not make a profit. The S&P is a random walking beast. I truely believe that because of arbitrage the S&P trades differently than commodities.
My theory of the underlying reasons has two parts:
- Indices are not normal speculative instruments in the sense that their price movement does not come primarily as a result of the trading in the instrument or it's underlying index. The price movement of an index is an accumulation of the price movements in the components stocks.
Since the price action of the S&P 500 is an averaging of many other individual markets, it won't behave the same as a market whose price action is determined solely by that market. The price movements of the strong stocks that cause a rise in the index are diluted by the weak stocks that are down during this rise, and vice versa. This causes a dampening effect on trends.
- The indices more purely demonstrate price movements resulting from investor psychology than underlying fundamentals. Individual stocks may rise for certain reasons, but the "market", being an almost wholly psychological concept, rises because of human sentiment based much more purely on feelings rather than logic. While this is certainly true of all markets, it is more true of the indices than other individual markets.
From a trend-following perspective, the best trends are not those that move the most, but those that move the smoothest. It is the choppiness of the trends, and the number of false movements that determine the profitability of a market.
It is my belief that smooth trends come when less individual traders, less weak hands, less amateurs (and I consider even most professionals who buy and sell stocks to be amateurs when it comes to trading) participate in the buying or selling that causes trends, the trend will be smoother. Amateurs tend to amplify the magnitude of the corrections, sometimes to the point where the trends don't compensate for the non-trending market losses.
There are ways to make money with the indices, however, these tend to be shorter-term approaches with average trades of several days rather than several weeks or months.