On Dec. 3, 2004 the Philadelphia Exchange changed the components of SOX index. The previous change before that occurred on 6/23/03. For details regarding the historical changes made to the SOX index please click the link. For a current component listing of the SOX index click this link. In summary, three changes were made in December 2004. Two companies were replaced and one company was added to the index increasing the total stocks in the list from 18 to 19. However, in both sets of graphs, the prices of the SOX index that were reported by the exchange were used and no effort was made to recompute the price of the SOX index using the prior component listing (pre 12/3/04 of 18 stocks). Since changes to the number of stocks within the index were made, the total daily volume, the McClellan Oscillator, and the Summation Index were recomputed after 12/2/04 to generate two sets of figures.
The reason for this web page is to demonstrate the impact of these changes and to help you understand how these changes affect your volume analysis. In 2003, we showed that changes to the Philadelphia exchange's XAU index clouded the interpretation of price and volume . At that time, volume surged due to the changes in the XAU and this lead to one conclusion. However, the XAU's index value was computed using a market capitalization weighted formula, which meant that simpling adding the component's daily total volume wasn't correct and that a more complicated computation was needed to determine the index's daily total volume. The importance of this was that when daily total volume from each component of the XAU was subjected to the same rules as price, the volume picture changed and actually produced an opposite view this sector's future price direction. In essence, higher highs were not accompanied with increased volume once volume was recomputed to match the index's price computation.
So the following examination of the SOX index serves to demonstrate the importance of the underlying indices formulation and how these formulas impact the daily total volume. In contrast to the XAU index, the SOX index is a simple price weighted average of the components. This means that adding the component stocks daily total volume is valid and thus a comparison of the daily total volume using the component listing prior to 12/3/04 and the new listing are shown below. Notice that despite the SOX index's increase in the number of components stocks from 18 to 19 occurred, the total daily volume actually dropped slightly. This is due to the replacement of Motorola (MOT) (a heavily traded stock) from the listing.
The following charts below are meant to demonstate the subtle differences after 12/3/04 and notice that the prices of the SOX index remain the same. So only the volume, McClellan Oscillator, and the Summation index produced slightly different results. As a matter of fact, upon careful examination of these differences, you'll see that interpretation of these price and volume charts are the same regardless of the changes made by the exchange and it also highlights the dramatic difference between the method of computation of the XAU and the SOX.
Below is a plot of the weighted volume for comparison.
Below the changes in the z-volume are small but don't materially change the outlook or interpretation of the chart.
Below you'll notice a small difference in the scaling, but despite the fact that the absolute values are different the relative changes to the McClellan Oscillator are the same.
Below notice that the scaling is different, which is due to different starting dates, but the actual direction of the Summation index matches.
