Howdy folks,
Markets are closed today in observance of the MLK holiday, so it’s a good time to step back and reflect on the bigger picture of how markets move.
When you look at the markets, it’s easy to focus on just one index — maybe the S&P 500 or the Nasdaq.
But the truth is, the markets don’t move in isolation. The major indexes — S&P 500, Dow, Nasdaq, and Russell — are deeply interconnected, and understanding those relationships can give you a clearer picture of market dynamics.
Let’s dig in.
How the Indexes Relate to Each Other
Each index represents a different slice of the market:
S&P 500: The big benchmark for U.S. stocks, tracking 500 of the largest companies.
Dow Jones Industrial Average: Focuses on just 30 blue-chip stocks but carries a lot of influence.
Nasdaq Composite: Heavy on tech and growth stocks.
Russell 2000: Tracks small-cap stocks, giving a sense of what’s happening outside the giants.
What’s interesting is how these indexes tend to move together — or don’t. On most days, if the S&P is up, the Dow and Nasdaq are probably moving in the same direction. But the size of those moves can vary. For instance:
A 1-point move in the S&P 500 typically equals a 6-point move in the Dow.
The Nasdaq, being tech-heavy, often moves more dramatically — it might jump or drop twice as much as the S&P.
These relationships aren’t hard and fast rules, but they’re good benchmarks to keep in mind.
What Happens When the Indexes Don’t Agree?
Discrepancies between the indexes can be telling.
For example:
If the Nasdaq is surging but the Russell 2000 is lagging, it might mean investors are favoring big, established tech companies over smaller, riskier plays.
If the Dow is outperforming the S&P, it could signal a focus on safety, as the Dow’s 30 stocks are generally considered more stable.
When these relationships fall out of sync, it’s a sign to dig deeper. Are traders hedging against risk? Is there a specific sector driving the action?
Using Intermarket Relationships to Trade Smarter
Here’s why this matters:
When the indexes are moving in harmony, it often signals confidence in the market. But when they diverge, it can hint at underlying uncertainty or shifting trends.
For example:
If all the indexes are moving higher together, that’s generally a bullish sign.
If only one or two are climbing while the others are stagnant or dropping, it’s worth asking why.
Traders who pay attention to these dynamics can spot opportunities and risks that others might miss.
Final Thoughts
The next time you’re watching the market, don’t just focus on one index. Take a step back and look at the bigger picture. The relationships between the S&P, Dow, Nasdaq, and Russell can give you valuable clues about what’s happening beneath the surface.
Markets are like a symphony — each index playing its part. Understanding how they harmonize (or don’t) can make you a more informed trader.
Stay sharp out there,
— Geof Smith
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