S&P 500: Features and recommendations

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  • The S&P 500 Index is an American stock index, which includes the stocks of 500 mostly American companies with the largest capitalization, traded on the US stock exchanges NASDAQ and NYSE. The calculation of the index, as well as its composition, is carried out by the analytical company Standard & Poor's. The S&P500 index is a kind of indicator of the state of the American economy, which includes companies in the financial sector, industrial, transport, information technology, and other largest companies, the total capitalization of which in 2020 was about $11 trillion.
  • The S&P 500 index is one of the most popular stock indicators in the US and the world, one of the five most influential world indices (along with the NASDAQ, Dow Jones Industrial Average, FTSE100, and Nikkei Stock Average). The index itself is a digital indicator, and derivative financial instruments for the index (options, futures, exchange-traded funds (ETF)) are traded on the exchange. There are also smaller contracts, such as mini-futures (E-mini), with a cost of 5 times less than the main contract.
  • The S&P 500 index futures is traded on the Chicago Mercantile Exchange (CME), where it is the underlying asset, on the CME Globex electronic trading system from 17:00 to 16:15 CDT time (12:00 - 11:15 GMT) from Monday to Friday. Technical break from 15:15 to 15:30 CDT (10:15 - 10:30 GMT).
  • The trading terminals of Forex brokers also offer CFDs (Contracts for Differences) of major stock indices, including the S&P 500 index, which are quoted in the terminal of many Forex brokers almost around the clock (except for the time between the end of the American trading session and the beginning of the Asian one (from 22:00: 00 to 24:00 GMT).

Features of trading the S&P 500 index

1. The dynamics of the S&P 500 index depends on several factors. In the first place is the situation in the US economy, their domestic and foreign economic policy. The country's economy grew steadily until the coronavirus pandemic in 2020, and the national currency, the US dollar, is included in the IMF's reserve currency basket. The S&P 500 index began its history in 1957 and showed unceasing growth until the end of 2021.

The S&P 500 rose especially sharply after the election of new US President Donald Trump on November 8, 2016, gaining about 10% by the end of February 2017, where it was trading at that time near the 2370.0 mark.

Even after the first wave of the coronavirus pandemic and the collapse in February and March 2020, US stock indices still rose, returning to a multi-year bullish trend. At the same time, in August 2020, the S&P 500 index updated its previous absolute maximum near the mark of 3397.0, reached in February before the collapse due to the coronavirus pandemic, and in early September 2020, the S&P 500 set a new historical record, having risen to the mark of 3588.0.

2. The monetary regulator of the US economic development is the Federal Reserve System, which acts as a central bank. Typically, tightening monetary policy has a negative impact on stock markets, raising the cost of borrowing and strengthening the national currency.

Until January 2022, the Fed, in a situation of slow economic recovery after the coronavirus pandemic, pursued an ultra-loose monetary policy, injecting billions of cheap liquidity into the financial system, and keeping interest rates near zero.

As Vice Chairman of the US Federal Reserve Richard Clarida stated at the beginning of September 2020, the regulator's management is discussing the idea of buying an unlimited number of government bonds to limit the growth of their yield. At the end of August 2020, the head of the Fed, Jerome Powell, during the economic forum in Jackson Hole, said that the leadership of the American central bank would abandon the practice of proactively raising interest rates to curb inflation and would not prevent the annual inflation target, which is 2.0%, from being exceeded. The Fed has kept interest rates low instead of raising them ahead of time to curb inflation, as has been the case in the past. This policy contributed to the weakening of the dollar and the growth of the US stock market.

Since February 2016, U.S. stock indices, including the S&P 500 index, began a period of almost non-stop growth, but they are declining in 2022, correcting deeply to the support levels that separate the long-term bull market from the bear market. The fall in US stock indices almost coincides with the beginning of the Fed's tightening monetary policy cycle. Thus, from the level of 0.25%, the key interest rate of the Fed was raised to the level of 0.50% in March 2022 and already to 1.75% in June 2022.

If the fall in stock indices continues, then the long-term bullish trend of the American stock market will come to an end, also indicating not only the excessive rigidity of the Fed's monetary policy, but also the beginning of the American economy's descent into a period of stagnation, and possibly stagflation. Although, according to the recent statements of Fed Chair Powell, "the US economy is strong" and able to withstand further tightening of the central bank's monetary policy.

3. The surge in trading volatility on the S&P 500 index falls on the period of publication, first of all, of important macroeconomic indicators for the US, as well as the Fed's rate decisions and speeches by the head of the Fed with comments on monetary policy in the US. In second place is the publication of important macroeconomic indicators for the Eurozone, China, Japan, and other countries of the world with the largest economies, the decisions of the central banks of these countries on the interest rate, as well as important political events in the United States and in the world. The following macroeconomic factors and indicators give the greatest volatility to the S&P 500 index:

  • the Fed's decisions on monetary policy in the US
  • speeches by the head of the Fed with comments on monetary policy
  • publication of minutes from the last Fed meetings on monetary policy
  • data from the US labor market
  • data on US GDP
  • publication of US inflation indicators

Strong macroeconomic indicators in the US lead, as a rule, to an increase in the S&P500 index, and vice versa.

4. Intraday volatility of the S&P 500 (CFD) fluctuates over time. On average, it is 70–80 points (the current S&P 500 CFD quote for July 2022 is 3800.0), but it can exceed 150 points during the publication of important news of a political or economic nature in the US and the world.

5. The S&P 500 index has a noticeable correlation with other US stock indices, primarily with the main ones—NASDAQ Composite, NASDAQ-100, and DJIA.

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