Yesterday, I was watching the Stock Market opening. After about a half hour, I went to our kitchen to get some coffee. When I left, the DJIA was UP by 70 points and, when I returned, perhaps two or three minutes later, the DOW was UP by 120 points–and it rose to approximately 145 points by a half hour later. I had been watching the Pre-Opening for about an hour before and such a run–some 50 points in just two or three minutes–was just unbelievable and unexpected..
But, then, I noticed the report of the ISM, a purchasing managers response to a poll. It was recorded as 51.5, for September. Generally, a number above 50.0 is considered to reflect optimism among corporations. That wass after ratings of below 50.0 for the prior three months. Later in the day, comments by Federal Reserve Chairman, Ben Bernanke, caused the DOW to drop, closing at an advance of 78 points. Still good, however.
I was curious about that large, sudden move shortly after 10:00 AM (barely 30 minutes into the trading day). So, I checked the trading volume of “SPY”, an exchange-traded fund (symbol SPY), which replicates the composition of the S & P 500 “broad-based” Index. Just after 10:00, 26.5 Million shares had been traded. At the same time, “Diamonds” (symbol DIA), which replicates the composition of the Dow Jones Industrial Average, only had a Trading Volume of roughly 1.5 Million shares.
The significant difference, between SPY and Diamonds, at least to me, shows the fact that Institutional Investors often use ETFs to take advantage of shifts in the market. I noticed a similar event, in late 2008, when (then) President-Elect Barack Obama announced his Economic Team in late November. Having at least one question answered, during a time of Substantial Uncertainty, was considered welcome news by many market participants at that time.
I would direct your attention to my Blog Post, “Which is Better: ETFs or Mutual Funds?”, on May 12. There I pointed out that large sums of money can be quickly shifted–either into or out of the market–very quickly using ETFs. Billions of US Dollars cannot be moved into a handful of stocks without disrupting the markets. This works for overseas market, as well.