Market Timing is an attempt to predict future price movements of a tradable elements (stock, index, futures or any other commodity). In other words, it's a strategy of finding correct time to buy and sell. Many traders use technical analysis as a tool to time the market, however, market timing strategy could be build on the elements of fundamental analysis, analysis of economy, financial news, financials announcements analysis, or combination of different types of analysis. Any analytical tool that allows to receive a certain degree of confidence in future price movement could be used in market timing strategy. Some of the most popular indicators in technical analysis that are used in market timing are: Advance/Decline Ratio, TRIN, MACD, Stochastics, Money Flow, Percentage Volume Oscillator, SBV Histogram, etc. Some of the most popular in timing models stocks are QQQQ (NASDAQ 100 tracking stock - traded on the NASDAQ Exchange) and SPY (S&P 500 tracking stock - traded on the AMEX Exchange).
Technical analysis is one of the most commonly used tools in defining possible future price trends. Technical analysis is based on the analysis of price, volume, advance/decline (for indexes and basket of stocks) and volatility data. Technical analysis can be separated into three phases. The first phase is based on an analysis of the history, finding price movements patters in history and interpreting them from the trader's sentiment (side). In the second phase of technical analysis, historical research results are used to explain the current price trend. In the last phase, technical analysis attempts to predict the possibility of future development of the price trend based on the interpretation of current market events and knowledge of past reaction on such events.
Fundamental analysis is a completely separate type of analysis that is used in market timing. Fundamental Analysis is based on the analysis of balance sheets, income statements, and other fundamental data and reports. Fundamental analysis is used mostly to time stocks. As a rule, stock trading involves a combination of fundamental and technical analysis. When it comes to index trading; trading index derivatives (QQQ, SPY, DIA, XLF, etc), index options or other index tracking securities; fundamental analysis can be omitted. For indexes, fundamental analysis is already performed by the companies that maintain indexes and index traders may focus solely on technical analysis.
There is no doubt that index trading is more preferred by traders. The fact, that QQQ and SPY (NASDAQ 100 and S&P 500 ETFs) are the most traded stocks in the world, speaks by itself.
The main reason why the majority of professional and retail traders prefer trading indexes, and Exchange Traded Funds (ETFs) in particular, is that applying technical analysis to indexes is more reliable and generates more stable and more profitable results.
When it comes to stock trading, there is a necessity for fundamental analysis. The stock price movements can be affected by unpredictable events, such as news, rumors, earnings reports and manipulations inside a company. However, indexes are less affected by rumors and manipulations than individual stocks. Since indexes are constructed on the back of stocks, an individual stock's fluctuations are smoothed by the general sentiment of the stocks from the index's basket. Furthermore, technical analysis of the indexes provides more consistent results.
Index trading is as simple as stock trading. The usual way to trade indexes is to trade Exchange Traded Funds (ETFs) that track indexes. ETFs are traded exactly like stocks - they can be bought and sold during trading hours, they can be traded on margin and they can be sold short. The difference between stocks and ETFs is that a stock reflects the performance of a publicly traded company and ETF reflects the performance of an index. DIA, QQQ, SPY, XLF, IWM are examples of some of the most popular ETFs.
The other ways to trade indexes is to use index options, ETFs options on index futures, and index tracking funds, etc.
Exchange traded Funds (ETFs) are index tracking stocks. If one share of stock represents a part of the ownership of a public company, one ETF share represents part ownership in all companies that are included in the index tracked by this ETF. Even if an ETF is considered to be a fund, it is closer in its trading abilities to stocks - as it can be traded exactly like a stock. Yet, the fund's ability to cover the entire portfolio of stocks makes ETFs unique. ETFs give the opportunity to buy or sell an entire portfolio of stocks in a single transaction and as easily as buying or selling a share of stock.
Exchange Traded Funds are traded like stocks and, like stocks, they can be bought and sold by the broker of your choice.
SPDR (also known as Spider) stands for Standard & Poor's Depositary Receipt. SPDRs are shares of the Exchange Traded Funds that are traded on the U.S. stock market. SPDRs shares are maintained and managed by State Street Global Advisors (SSgA).
There are several SPDRs Exchange Traded Funds: SPY tracks the S&P 500 index, MDY tracks the S&P 400 index, and XLF tracks the financial sector in the S&P 500 index, etc. SPY shares is the most commonly traded ETF from the SPDRs group and, in the majority of cases, when traders talk about "Spider" or SPDRs, they mean the S&P 500 index or SPY stock.
The answer to this question is very simple. EVERYONE. ETFs have no margin requirements and minimum investments.
One of the most common questions when it comes to trading is what trading vehicle to chose. Since QQQ and SPY are the world's most commonly traded stocks, this question very often is narrowed to whether to trade QQQQ ("Qubes") or SPY ("Spider" or SPDRs). Since both of these stocks track indexes, the answer could be "whatever you feel more comfortable with."
If you are more comfortable in analyzing the S&P 500 index, you may trade SPY, and if the NASDAQ 100 analysis provides better results for you, you may select QQQQ. Some investors prefer the S&P 500 over the NASDAQ 100 because the S&P 500 index covers the 500 largest U.S. companies, whereas the NASDAQ 100 is limited to only 100 Hi-Tech companies. As a result, the S&P 500 index is considered to be a better barometer of the U.S. economy than the NASDAQ 100 index. Other traders may prefer the NASDAQ 100 index and QQQQ because they are more volatile and thus there could be potentially bigger profits.
When it comes to volume analysis, some traders may prefer the S&P 500 and SPY because the S&P 500 has a larger average trading volume and the S&P 500 volume is less affected by volume spikes of individual stocks.
Commission is another aspect that is often considered. Since SPY is twice as expensive as QQQQ, many institutional traders chose SPY over QQQQ when it comes to the large transactions (when commissions depend on the number of shares that are bought or sold).
Unlike traditional mutual funds, Exchange Traded Funds (ETFs) can be traded during trading hours. ETFs trading is as simple as trading stocks. It is even much simpler than trading stocks. Due to the high popularity of ETFs, most of them are very liquid and, as a rule, more liquid then stocks. Furthermore, your buy and sell order can be executed much more quickly than a buy/sell order of stocks.
Unlike traditional mutual funds, there is no minimum purchase requirement for Exchange Traded Funds (ETFs). You may purchase as little as one ETF share.
There are several reasons for choosing indexes for investment. Some of the main reasons are