Before I delve into this topic, let’s think in a more abstract sense.

Is Crowd behavior the same as Individual behavior?
Does the average income of a nation give you a sense of your friend’s income?
Why do psychologists study Social Psychology separately compared to Individual Psychology?
Can an Individual influence the crowd?

Hope you get the drift?

One of the biggest mistakes which traders make is to look at an Index Futures / Options product as if it were a Stock. This assumption makes them sure the same set of measures or indicators to measure both.

For instance a Pullback in an Index is not caused by selling or buying of the index futures product at that point of time, whereas a pullback in a Stock price or its derivative happens due to buying and selling pressure in it.

Lets take a look.

If you look at the image above, its you will see we had a V shaped day, but what you need to look at it is how the constituent stocks behaved both during the down move and the up move. If you notice the down move was caused by almost all Sectors as highlighted in the image + Reliance however HDFCBank and IT Stocks were quite resilient.

In the second half of the day, HDFCBank lead the up move, with other joining however IT Stocks remained flat.

Now, what is it that we can learn from this.

Indexes are essentially influenced by Stocks or Sectoral Swings, Sectorals are Stocks belonging to a sector within the index constituents. (I will do a detailed post on the Sectoral Studies later next week) - Hence if you are trading the index you better keep an eye on the Sectorals as they can be leading indicators depending on their respective index weightage.
Individual Stocks have their own drivers, depending on news and other sentiments.- Microstructure tools like Orderflow and Orderbook data are better suited for stocks than Indexes.
This is also the reason why Indexes are more mean reverting than Individual stocks.

So to sum it up, we need to understand the difference between Crowd Behavior (Index) and Individual Behavior (Stocks) and know which individuals have the power (Stock Weightage) to influence the crowd and which ones don’t