Where is the S&P 500 going from here?

Posted on | Friday, December 18, 2009 | No Comments

In broad terms, that's a very simple question, the answer is up.

The reason has nothing to do with anything currency or economy related. It is because of something not often talked about. It's called survivorship bias.

Notice as of late the increase in S&P index rebalancing since November. Today was no exception with the addition of V and whoever else to the index. The index that you see day in and day out is comprised of only "winning" companies. The losers, or the failed bankrupt companies, are removed from the index and replaced with companies that have not yet failed.

To recreate what this looks like, take your cumulative net profit from every day the past month/year and plot it. Then subtract all the losing trades and once again plot your cumulative net profit. Compare the two. Congrats, you've just rebalanced the very same way we rebalance the S&P 500 by simply not recognizing the failures. Sure looks great doesn't it ;)

Keep in mind if you actually owned every company outright that was ever in the S&P, you too would be bankrupt. Funny how this business works.

Add some leverage to the mix and off we go!


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