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Stock Markets Percent change.


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2009 Dec 9, 4:43am   2,010 views  2 comments

by Katy Perry   ➕follow (0)   💰tip   ignore  

I'm really just trying to understand this. Can someone help.

There are three seperate markets in the US with different companys in each. How can the percent changes in these markets be only a 1/4 to 1/2 percent different from each other everyday, every minute of the day? I've been looking at this over the last few weeks. How can this be?

#investing

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1   pkennedy   2009 Dec 9, 8:05am  

Markets in general follow the economy, and peoples sentiment. Sometimes they do diverge, but generally if the market pushes the general market in one direction, then everyone will follow suit.

Over a year, often each market will be different, but over a year it will only diverge by a few % points. Over a year, each market should only move maybe 10%, so a few % points every day is a lot for each to move. Once averaged out over a year, there is often a difference, depending on what is happening in the economy.

2   justme   2009 Dec 10, 6:11am  

First of all, I think you're talking about 3 different stock indices, e.g. DJI, SP500 and COMPX(Nasdaq Composite), rather than 3 different markets.

Now, about the tight correlation between these indices: Pkennedy described it well, on a day-to-day basis the correlation is quite strong, but over the course of time the small differences add up.

Something similar is afoot when it comes to correlation between individual stock versus the indices. On a daily basis, even lousy stock goes up if the index goes up. But in the long run, differences will appear.

I think there are multiple reasons that correlations have become seemingly stronger in the last few years:

1. index funds drive the indices

2. significant events in one major stock spills over into other stocks in the same segment, and sometimes the whole index or even the whole market. Groupthink is part of it, and excessive valuations make all stocks sensitive to what other stocks are doing.

3. Manipulation: The big guys trade index futures in the off hours and create self-fulfilling expectations about where the market/index will open in the morning.

4. it is easier for wall st to make money if they can manipulate the whole market up an down on a daily basis, and do proprietary trading against their retail or institutional customers.

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