The S&P 500 Index is capital weighted (see top chart example). Component weighting utilizing this method is based upon market capitalization, so one component basically counts more or less (carries more or less weight) than the next when figuring the current value of the total composite. A one point price move in a component with a larger market capitalization affects the parent index or ETF total value more than a component with a smaller market capitalization. The Dow Jones Industrial Average is price weighted. In this method, component weighting is based upon the price of the component issue. In other words, if you started a new 30 component index today, this method would add the current price of the 30 components and divide by 30. Similar to capital weighting, one component thus carries more or less weight than the next, but in this method the higher priced components carry more weight than lower priced components (as simple as this method sounds, it gets very complicated, very quickly when the divisor is changed - in other words, in our example, you would no longer divide by 30, but instead, another number calculated to compensate for various component changes such as spin-offs, etc. - the Dow's divisor is currently less than one). composite breadth data is inherently equal weighted. Each component of an index or ETF carries exactly the same weight as the next. If 316 components of the S&P 500 Index increase in price for the day, the composite breadth statistic, advancing issues (or simply "advances"), is 316. Because most indexes and ETFs are not similarly equal weighted, a possible conflict presents itself. For example, using a capital weighted index like the S&P 500 Index with equal weighted composite breadth data could potentially be akin to comparing "apples and oranges". To address this issue, in addition to providing historical market values, MasterDATA recalculates all followed indexes and ETFs as equal weight (see bottom chart above example). Both sets of historical data are included in downloads from this site, both actual values and recalculated values. The process of recalculating each index and ETF as equal weight developed into a much larger project than one might anticipate from the idea's initial conception. For one thing, each of as many as 3400 component issues had to be filtered and manually corrected for historic price errors (our data vendor is one of the biggest and "best", but an error here and there can quickly result in a major impact on total values). Additionally, numerous methods were implemented before arriving at one that displayed absolutely no "drift", but instead provides meaningful values comparable to the indexes' and ETFs' actual market valuation. The result of this work is very intriguing. While the overall chart patterns remain basically the same, price moves are generally smoother. A large price move in a heavily weighted component does not overly impact the index or ETF value unless other components experience similar movement. From a technical analysis point of view, equal weighting might be considered the ideal methodology for composites. In any event, the data is provided at no additional charge. It is your decision and your decision alone to use it or not. |
