You are using the for loop wrong.

This takes each character in the string, assigns it to x, and prints it:

for x in 'aabfh':
    print (x)

This takes each character in the string, assigns it to list1[i], and prints it:

for list1[i] in 'aabfh':
    print(list1[i])

In your code, if you look at list1, you will find that it has been changed to ['h', 'h', 'h'] because that's what you told it to do (or at least as many h's as "some condition" will allow).

Given:

s = 'ABCDEFGHIJKLMNOP'
targets = 'CDE','XYZ','JKL'

With loops:

for t in targets:
    for i in range(len(s) - len(t) + 1):
        for j in range(len(t)):
            if s[i + j] != t[j]:
                break
        else:
            print(s[i:])
            break
    else:
        print(t,'does not exist')

Pythonic way:

for t in targets:
    i = s.find(t)
    if i != -1:
        print(s[i:])
    else:
        print(t,'does not exist')

Output (in both cases):

CDEFGHIJKLMNOP
XYZ does not exist
JKLMNOP

The problem with you code is that you use for eachWord in str1. This means you iterate through each character in str1 rather than every word. To solve this, use str1.split() to separate words. You also should have the if str2 in str2 outside the for loop; check if str2 is in str1, and iterate through str1 if it is, rather than iterating through str1, and checking if it contains str2 every time.As a word can appear in the sentence more than once, you won't be able to use str1.split().index() to find all the positions, as index() always returns the lowest position of an item in a list.

An easier method is to use a list comprehension:

positions=[x for x in range(len(str1.split()))if str1.split()[x]==str2]

This will contain all the indexes of str2 in str1.split().

Final code:

positions=[x for x in range(len(str1.split()))if str1.split()[x]==str2]
if positions:
    for position in positions:
        print("That word was found at index position",position)
else:
    print("Sorry that word was not found")

Input:

Please enter a sentence: i like to code in python and code things
Thank you, you entered:  i like to code in python and code things
Please enter a word: code

Output:

That word was found at index position 3
That word was found at index position 7

Let's break down your code line by line:

needle = 'sses'
haystack = 'assesses'
count = 0                  # initialize the counter

Fine so far, this is only initialization.

index = haystack.index(needle) # get the first character in the substring

This line already is a problem, index raises a ValueError if it doesn't find the substring. Your program would crash in this case. You should instead use haystack.find(needle) which does the same, but instead of raising a ValueError it return -1 if the substring isn't found.

I do however not understand why you use this line at all. Your following loop will loop through the whole haystack and will also find the first appearance of needle.

string1 = haystack[index:len(needle) + index] # get the whole substring

This line is only valid if needle was found in the previous line. Also guess what string1 will be after this line? You are extracting the part of haystack where you previously found the substring needle. So the result will be string1 == needle, which won't help you in any way.

for position in range(0,len(haystack)): # loop through the string

ok, you loop through all positions in the string.

    if haystack[position:len(needle) + index] == string1: # match the 1st substring

So here I don't get why you want to find the first occurence again, which you already found before. Don't you want to check whether there is a match at position, no matter whether it is the first or second or third... one? So I would guess that haystack[position:len(needle) + index] is supposed to extract the substring of haystack that starts at position position and has length of needle. But why is there + index then? What has the first occurence (saved in index) to do with this? Don't you mean + position here? Finally you are comparing to string1 which as I said will be (if your code makes it to this line) equal to needle. So why not directly compare to needle?

    count += 1 # iterate the counter

This line is wrong indented in your posted code, it should be one deeper than the if-statement.

Finally you have to consider in your for-loop, that if position gets to the end of haystack there might not be a substring with length len(needle) starting at position anymore. So you probably want to stop iterating prior to that. (EDIT: I just notice that the code will run correctly anyway. It is not necessary to address this in python, because using indexes out of bounds of the string is allowed, but it would be in other languages.)

I guess this is an exercise, but if it wasn't there would be a much easier way to do this in python: count = haystack.count(needle). There is a small difference to your proposed algorithm though. string.count(substring) will return the number of non-overlapping matches, while your current code would find the number of non-overlapping and overlapping matches. The exercise as posted by you is unclear which of both is meant. But if you are supposed to find only non-overlapping results you need to consider this in your for-loop, too.

There are also several improvements one could make to the style and performance of your code, but I will not get into this, as you seem to have trouble getting it to work at all.