What actually moves an index

An index is an average, and averages are reassuring. This one should not be, because the weighting means it is not the average you probably picture.

One company can move a major index

In a cap-weighted index the largest constituent might carry several times the weight of the median one. A large single-company move - an earnings miss, a regulatory decision - can move the whole index on a day when most constituents did very little.

So the honest reading of a 1% index move is not "the market fell 1%". It is "the weighted sum of these constituents fell 1%", and the difference between those two sentences is sometimes the entire story.

Sector concentration does the same thing more quietly

Indices are not evenly spread across industries. Some are heavily weighted toward one or two sectors, and a sector-wide move then reads as a market move.

This is why comparing two countries' indices as a proxy for their economies is unreliable. You may be comparing a technology-weighted index with a bank-and-energy-weighted one, and learning about sectors rather than about countries.

The genuinely index-wide drivers

• Interest rate expectations, which change what future company earnings are worth today.
• Broad risk appetite, which moves everything together and is what makes correlations rise in a selloff.
• Currency, for indices whose constituents earn abroad - a weaker home currency can lift the index while nothing improves domestically.

That last one catches people out. An index rising because the currency fell is not the same event as an index rising because business improved, and in the local currency they look identical.

And flow, which is not a view at all

Lesson 3 covered it: tracker inflows, rebalancing, hedging. On a quiet day this can be most of what you are looking at, which is why hunting for the news behind every move sometimes finds nothing. There was no news. There was a calendar.