Fresh Year, Fresher Markets

New market launches and a deep dive on trading the S&P 500 close price

Author

Kalshi Official
January 19, 2023

America First is becoming America Last in what is shaking out to be a great global market reversal. US stocks’ outperformance against the rest of the world is reversing. This week, we're deep diving into how you can trade on the potential of that reversal. 

But first, you asked and we answered. A new year means many new markets -- plus some yet to be released in our pipeline. Let’s preview some of the ones we recently dropped.

New Year, New Markets 

It's Grammy season, and who are we to get in the way of your celebrating.

🎤 Who will win Album of the Year at the Grammys?

🎤 What will win Record of the Year at the Grammys?

🎤 Who will win Song of the Year at the Grammys?

  • Easy On Me (leading with 43%)

  • All Too Well (10 Minute Version) (The Short Film) (21%)

  • As it was (12%)

  • See the complete list 

🎤 Who will win Best New Artist at the Grammys?

📜 Will a new Supreme Court justice be confirmed by December 31, 2023?

❄️ How much will it snow in NYC in January?

💵 Will the debt ceiling be raised or suspended?

🏦 What will the Bank of England set the bank rate to at their Feb 2, 2023 meeting?

  • 3.5% or higher (97%)

  • 3.75% or higher (99%)

  • 4% or higher (70%)

  • 4.25% or higher (5%)

  • See the market

How to Trade the S&P 500 Close Price

We’ve watched as US stocks have fallen, as concern over an economic slowdown and higher interest rates weigh on risk sentiment. The S&P 500 Index just dropped for a third day, testing the 3,900 level after the benchmark’s biggest selloff in a month yesterday.

Let’s dive into how you can trade on this volatility in the short-term and long-term.

Summary

  • The S&P 500 has been in existence since 1957, and has a long track record of accurately reflecting the performance of the U.S. stock market. Investors and financial professionals globally use it as a benchmark, adding to its credibility and reliability.

  • Investors can trade on the index price over three different frequencies: Daily, Weekly or Annually

  • The close price of the S&P 500 can be influenced by a variety of economic and market factors, such as interest rates, inflation, corporate earnings, and global economic conditions. 

  • If you have a long-term investment horizon, trading an event contract with a expiry that is further away may allow you to achieve higher potential returns on your investment.

The S&P 500 is widely regarded as the best single gauge for the US stock market. Investors and analysts around the world track its value and use that performance as the benchmark for the overall health of the stock market. It is also widely used as a benchmark for the performance of individual investments or your overall portfolio. 

Historically, investors passively track or invest in products tied to S&P’s value. Now, through S&P 500 Index Value markets, traders can actively profit from changes in this value – whether positive or negative. 

Overview of the S&P 500 

The S&P 500 is a stock market index that represents the performance of approximately 500 large, publicly traded companies in the United States. It is considered one of the most important stock market indices in the world for a few reasons: 

  • It is a broad market index: The S&P 500 includes a diverse range of companies from different sectors of the economy, including financial, technology, healthcare, energy, and consumer goods. This means that it provides a good representation of the overall performance of the U.S. stock market.

  • It is highly liquid: The S&P 500 includes some of the most actively traded stocks in the market, which makes it easy to buy and sell index funds and other products that track the index.

  • It is widely followed: The S&P 500 is followed by investors and analysts around the world, and its performance is often used as a benchmark for the overall health of the stock market.

  • It has a long track record: The S&P 500 has been around since 1957 and has a long history of performance data, which makes it useful for long-term investment analysis.

Traditional Ways to Trade the S&P 500

Investors gain exposure to the S&P 500 through different financial products, depending on their investment goals and risk tolerance. The most popular ways traders have historically gotten exposure to the S&P 500 are:

1. Buy individual stocks: You can buy individual stocks that are members of the S&P 500 index. This requires substantial research and due diligence on your part to select the “right” stocks.

Pros:

  • Allows you to select specific stocks that you believe have strong growth potential

  • Can potentially earn higher returns if you select the right stocks

Cons:

  • Requires a lot of research and due diligence to select the right stocks

  • Higher risk due to the lack of diversification

  • Takes more time and effort to manage compared to other investment vehicles

2. Mutual funds: You can invest in mutual funds that track the S&P 500 index. These funds are managed by professional fund managers who buy a diversified portfolio of stocks in the S&P 500.

Pros:

  • Professionally managed by fund managers

  • Offers diversification as it invests in a wide range of stocks in the S&P 500

  • Lower risk compared to individual stocks

Cons:

  • May have higher fees compared to other investment vehicles

3. Exchange-traded funds (ETFs): ETFs are investment vehicles that track the performance of a specific index, such as the S&P 500. ETFs can be bought and sold like stocks on a stock exchange.

Pros:

  • Low-cost compared to mutual funds

  • Can be bought and sold like stocks on a stock exchange

  • Offers diversification as it tracks the performance of a specific index, such as the S&P 500

Cons:

  • May be subject to market fluctuation

4. Index funds: Index funds are mutual funds or ETFs that track the performance of a specific index, such as the S&P 500. Index funds are a low-cost way to invest in a diversified portfolio of stocks.

Pros:

  • Low-cost compared to mutual funds

  • Offers diversification as it tracks the performance of a specific index, such as the S&P 500

Cons:

  • May be subject to market fluctuation

Trading the S&P 500's Underlying Value 

Trading on the value of the S&P 500 is a more modern opportunity for investors to take advantage of its price movements – whether positive or negative – without needing to own financial instruments tied to it. Investors can trade on the index price over three different time intervals:  

  1. Daily 

  2. Weekly 

  3. Annually  

Trades simply represent an investor’s answer to the question: What will the value of the S&P 500 be at the end of that [day] OR [month] OR [year]?

Investors can trade each contract, but each has a different time horizon. In other words, each frequency determines how long you have to research before trading, how long you are holding the contract, and the amount of volatility and/or profit you may see once the contract resolves. Each time horizon has different strategies and risks to consider in order to optimize your trade. 

Trading over Different Time Horizons

Evaluating the close price of the S&P 500 either tomorrow or by the end of the year involves considering different time frames and the various factors that may impact the index's performance over those time periods. Let’s discuss the main factors to consider:

Short-term versus long-term trends: The S&P 500 is a stock market index that represents the performance of 500 large publicly traded companies. You can look at the overall trend of the index by examining its chart over a period of time.

If you are evaluating the close price by tomorrow, you may want to focus on shorter-term trends and factors that could impact the index's performance in the near term. If you are evaluating the close price by the end of the year, you may want to consider longer-term trends and factors that could impact the index's performance over a longer period of time.

Economic and market factors: The close price of the S&P 500 can be influenced by a variety of economic and market factors, such as interest rates, inflation, corporate earnings, and global economic conditions. These factors can have a different level of impact depending on the time frame you are considering.

For example, a change in interest rates may have a more significant impact on the index's performance over the long term than it would over the short term.

Individual stock performance: You can also evaluate the close price of the S&P 500 by analyzing the performance of the individual stocks that make up the index. This can help you identify any sectors or industries that are driving the index's movement.

Use technical analysis: Technical analysis involves using past price and volume data to predict future price movements. You can use technical indicators, such as moving averages and oscillators, to help evaluate the close price of the S&P 500 over different time frames.

Consult financial news and analysis: There are many financial news outlets and analysts that provide insights and analysis on the S&P 500 and other market indicators. These sources can help you better understand the factors that are influencing the index's performance over different time frames.

Compare it to similar financial products: If you’re looking at the S&P’s historic performance during the week or over the past year and aren’t certain where to go next, consider researching how financial products tied to the S&P 500 are currently performing (i.e. SPY, an ETF designed to track the S&P 500 stock market index; also the largest and oldest ETF in the world).

Trader Case Study 

Kalshi trader, Cordage, monitors major economic events and then analyzes how they may impact Kalshi's basket of index markets. He first identifies how a certain event could shift the stock market, and then researches how similar investments to Kalshi's Weekly S&P Close Price market is reacting.

As a frequent Kalshi trader, Cordage used our economic calendar and noticed August's CPI print (published September 13th) was set to come out soon. In the week leading up to the CPI's release, he began monitoring E-mini S&P 500 (“ES”) weekly contracts to see how prices would fluctuate. On the night of the 12th, he noticed the value of ES plummeted from 4110.75 to 3931.25. He then went over to Kalshi and predicted the S&P 500 would end the week with an index value between 3900-3949.

Cordage's prowess saw him return ~766.76%, getting into the market right before the price drop.

Takeaways

Both short-term and long-term index value markets carry some level of risk, so there is no guarantee that you will achieve a positive return on your investments. It's important to carefully consider your risk tolerance, investment goals, and financial situation before making any investment decisions. Some pros and cons to consider when deciding whether to trade a daily or annual market: 

Benefits to a shorter-term investment horizon: 

  • Potential to capitalize on short-term market movements: If you have a short-term investment horizon, you may be able to capitalize on short-term market movements by buying and selling more quickly. In other words, the quantity you’re able to trade in daily S&P 500 event contracts may end up achieving more profits than those you may make from one trade on an annual contract. 

  • Flexibility to respond to changing market conditions: With a short-term investment horizon, you have the flexibility to respond to changing market conditions by adjusting the price you believe the index will close at on any given day. In other words, the next day you can trade on a different close price, rather than holding the contract as the price continues to move unfavorably relative to your prediction.

Downsides to a shorter-term investment horizon: 

  • Higher risk: Short-term investments tend to be riskier than long-term investments, as they are more vulnerable to market fluctuations.

Benefits to a longer-term investment horizon: 

  • Potential for higher returns: Historical data shows that if you have a long-term investment horizon, you may be able to achieve higher potential returns on your investments.

  • Ability to ride out market fluctuations: Markets tend to experience short-term fluctuations, which can be caused by a variety of factors such as economic conditions, company news, and geopolitical events. If you have a long-term investment horizon, you have the ability to ride out these short-term fluctuations and potentially benefit from the market's long-term growth.

Downsides to a longer-term investment horizon: 

  • Lower flexibility: With a long-term investment horizon, you may have less flexibility to respond to changing market conditions.

  • Risk of missed opportunities: If you have a long-term investment horizon, you may miss out on short-term opportunities to capitalize on market movements.

It's important to note that the S&P 500 is just one indicator of market performance, and it is not a guarantee of future returns. It is always important to carefully consider your investment goals, risk tolerance, and financial situation before making any investment decisions.

Happy trading!