- December 12, 2021
- Posted by: Robert Brown
- Category: Investing
There was a time when multinational corporations were relatively few however increased global trade in every level of business has changed this. Today both large and small companies have offices, manufacturing operations, and trade associations or sell goods around the world. As a result, stock markets around the world reflect the global nature of the companies trading on their exchanges which in turn reflects the growing integration between each trading market. Fluctuations in one exchange often have a domino effect in other exchanges due to a number of economic relationships between the markets. Outlining all the factors that play into these relationships is another discussion but suffice it to say that in the most general sense the impact on the market is based on speculation.
The increasing influence that price changes in one exchange have on others is the reason why it is more important to monitor global market changes than it has ever been before. A few hours or even minutes premonition of how a market might open could make the difference between a profit or a loss. As one market closes another opens, first New York which precedes the Asian markets such as Tokyo, Shanghai, Hong Kong and Bombay which in turn precede the European Markets including Germany, France and Britain then back to New York. The reflective trends of these markets mirroring each other can easily be seen by comparing major indices within each market. You can chart the performance of for instance the Dow Jones Industrial Average against the Nikkei and Hang Seng in Asia and then for instance the DAX, CAC and FTSI in Europe. You will notice how the trends follow each other. In terms of indices it really does look like a global economy.
World Stock Indices are the bell weathers of the markets they represent but some considerations must be taken into account when analyzing the impacts one exchange has on another using the indices.
First and foremost Indexes are based on groupings and averages of stock prices within a market. They are not actually traded instruments and so there is no volume for indices, thus there is no consideration for demand within the index price. Without a gauge of momentum within the market a change in the market could represent only a fraction of the market or in contrast a major movement, the point is that from the index price there is no way to know what volumes are trading, simply because there is no volume.
Secondly, indices should not necessarily be compared on an equal scale, for example there are significant differences between the economies of the US and the Philippians which make equal comparisons between the Dow Jones Index or S&P 500 and the Manilla Composite somewhat skewed.
Thirdly, you should definitely investigate the composition and company profile of the corporations within each index you compare. Some indices are composed of companies based on size, or sector which would not compare well with other indices based on different criteria.
The fourth consideration should be investigating the index basis such as when it was created and the base value when it was initiated, when indices are first introduced they are set with a base or initial value and then changes from the base value are deemed to reflect changes in the particular sector or market the index is attempting to indicate. In this way an index with a value in the thousands may or may not have a relationship with and index in the hundreds which was created recently in other words the actual point value is much less important than the percentage change of the index.
The last point we will deal with here is the currency basis of the index. Although indices are not technically “currency valued” index totals are based on share prices within any particular market and thus the real value is affected by the currency underlying the securities. For example as I write this article the NIKKEI Index is running at 15583.42 while the Dow Jones Industrial Average is at 13,087.13 but the Nikkei reflects prices of securities traded in Japanese Yen which is currently trading at .009 against the US Dollar. So in reality if the scale is equalized the Nikkei would be at 140.42. This presents a view of the difference in scale between the two indices and further demonstrates why it is much more important to compare performance when comparing indices if you want a more accurate picture.
I mentioned the problem with momentum previously where the lack of volume display prevents you from gauging the change of an index in regards to the level of trading within that market that day. There are some other tools you can use however to compensate for this. One is to use the market statistics and compare the trade volumes on the entire market. If you would like to run momentum based indicators on the closest representation of the index you can use ETFs which do have volume. The volume of the ETF does not represent the cumulative volume of the securities from an index rather the ETF volume represents the volume of the ETF traded however the use of the ETF will permit you to run momentum based indicators such as MACD on the price trends of a version of an index. In the near future however you will be able to obtain a much better grasp of the momentum behind some indicators as we are planning on adding the cumulative volume of some indices to a representative portfolio of securities to allow people to perform accurate and true momentum based technical analysis on indices on our site for free.
It is important to follow the international indices of markets closing prior to your market’s open which often indicate the future trading of the following markets. However, it is also critical to place your analysis within the perspective of the framework you are working in, understand the basis of the data you are using to compare the indices properly.