SPY vs ES: Who’s leading the S&P 500?

This is a guest post by Precision Capital Management.

Yesterday, the Pragmatic Capitalist (ht ZH) questioned who the mysterious large buyer of eMini S&P 500 futures (NYSE:ES) was, when there has not been a corresponding large buyer of SPY ETF shares over the same short periods.  We decided this warranted a further investigation to assess, in the larger context, whether it is SPY or the ES that has historically had the greatest impact on the S&P 500 cash index, and the results were surprising.

Methodology and Notes:  After normalizing the volume for both the ES and SPY over one minute periods going back to June, 2001 (when suitable data begins),  the relative difference in volume was multiplied by the change in one minute price of the Cash S&P 500, with a running total kept for the ES and SPY (similar to Effective Volume and Larry Williams A/D calculation).  The first minute of each trading day was not used so as to eliminate the effect of opening gaps.  Only SPY trading hours were used for the ES (9:30 am to 4:00 pm EDT).  The gap opening phenomenon associated with the ES futures is important, but a subject for another post.  A further caveat–S&P 500 pit futures exceeded the ES futures in total dollar amount traded until a few years ago and were more significant in influencing the cash S&P 500; however, we don’t have minute volume data for it, and it was not considered.  This preliminary study does not attempt to weigh the effects of the actual stocks that comprise the S&P 500 and implicitly assumes it is possible to lead the cash S&P with ES futures and/or SPY.

Relative effect of ES and SPY volume on Cash S&P 500


The weekly chart, above, demonstrates that SPY volume (scaled left) has been basically on permabid since the beginning of 2002, with the ES only aiding the bulls (at least during the day session that we are measuring) from mid-2005.  The ES was showing chinks in the rally’s armor in Q4 2007 and led nearly the entire bear leg, with SPY relenting and sharing the lead down only during February 2009.  It may be worth remembering this when we get another down leg.


In the daily chart, we’ve highlighted some interesting inflection points.  After the ES led most of the early rally from the March 2009 low, it led the June correction, after which SPY took the reins into the end of August.  Curiously, since then it’s been nearly flat, while the ES has led most of the down ward legs.  This is due to the fact that SPY’s upward and downward contributions have been netting more intraday, which suggests that either (1) the bullish firepower has been temporarily directed to the ES (though the fact that the ES’ net contribution is trending down is ominous), or (2) that there is institutional selling in SPY that is counteracting the upside firepower.

Fortunately, there may be some trading insight to be gained here.  In future posts (free registration), we will attempt to determine if interim bottoms and tops in the S&P 500 can be anticipated and confirmed by these measures and their derivatives, especially when taking into consideration divergences between the two and by delving intraday.  Until then, it looks like SPY has picked up the slack today where the ES left off, so we should be safe until tomorrow.

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