There was a time when multinational corporations were relatively few in number, however the rise of global trade at all levels of business has changed this. Today, both large and small companies have offices, manufacturing operations, and trade associations or sell products around the world. As a result, stock markets around the world reflect the global nature of the companies listed on their exchanges, which in turn reflects the increasing integration between each trading market. Fluctuations on one exchange often have a ripple effect on other exchanges due to a number of economic relationships between the markets. Delineating all the factors that go into these relationships is another discussion, but suffice it to say that, in the most general sense, market impact is based on speculation.
The growing influence that price changes on one exchange have over others is why it is more important than ever to monitor global market changes. A few hours or even minutes of anticipation of how a market might open could mean the difference between a profit or a loss. When one market closes, another opens, first New York, which precedes Asian markets such as Tokyo, Shanghai, Hong Kong and Mumbai, which in turn precedes European markets including Germany, France and Great Britain, and then returns to New York. The mirrored trends of these markets mirroring each other can be easily seen by comparing the major indices within each market. You can plot the performance of, for example, the Dow Jones Industrial Average against the Nikkei and the Hang Seng in Asia and then, for example, the DAX, CAC and FTSI in Europe. You will notice how the trends follow one another. In terms of indices, it really does look like a global economy.
World stock indices are the bell climates of the markets they represent, but some considerations should be kept in mind when analyzing the impacts one exchange has on another using the indices.
First, indices are based on groupings and averages of stock prices within a market. They are not actually traded instruments and therefore there is no volume for the indices, so demand is not factored into the index price. Without an indicator of momentum within the market, a change in the market could represent only a fraction of the market or, on the contrary, a significant movement, the point is that from the price of the index there is no way of knowing what volumes are being traded , simply because there is no volume.
Second, the indices should not necessarily be compared on an equal scale, for example, there are significant differences between the US and Philippine economies that make equal comparisons between the Dow Jones or S&P 500 and the Manilla Composite be somewhat biased.
Third, you should definitely research the composition and company profile of the corporations within each index you compare. Some indices are made up of companies based on size or sector that would not compare well to other indices based on different criteria.
The fourth consideration should be to investigate the base of the index, such as when it was created and the base value when it was started, when indexes are first introduced, they are set to a base or initial value, and then changes in the base value are considered. reflect changes. in the particular sector or market that the index is intended to indicate. Thus, an index with a value in thousands may or may not have a relationship to an index in hundreds that was recently created; in other words, the actual point value is much less important than the percentage change in the index.
The last point we will cover here is the monetary base of the index. While indices are not technically “currency valued,” indices totals are based on stock prices within a particular market and therefore actual value is affected by the currency underlying the indices. values. For example, as I write this article, the NIKKEI is at 15583.42, while the Dow Jones Industrial Average is at 13,087.13, but the Nikkei reflects the prices of securities traded in Japanese Yen, currently trading at 0.009 against the US dollar. So actually, if the scale equalizes, 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.
Earlier I mentioned the issue with momentum where the lack of volume display prevents you from measuring the change of an index relative to the trading level within that market that day. However, there are a few other tools you can use to compensate for this. One is to use market statistics and compare trading volumes across the market. If you want to run momentum-based indicators on the closest representation of the index, you can use ETFs that have volume. ETF volume does not represent the cumulative volume of securities in an index, rather ETF volume represents the volume of the ETF traded; however, using the ETF will allow you to run momentum-based indicators, such as MACD, on the price trends of one version of an index. However, in the near future you will be able to get a much better understanding of the momentum behind some indicators, as we are planning to add the cumulative volume of some indices to a representative portfolio of stocks to enable people to take accurate and true technical actions based on momentum. index analysis on our site for free.
It is important to follow international indices for markets that close before your market opens, which often indicate future trading in following markets. However, it’s also critical to put your analysis into the perspective of the framework you’re working in, to understand the basis of the data you’re using in order to compare the indices correctly.