Do the global stock markets move in sync?

I have been receiving a number of questions from members regarding the direction of various stock markets.  Questions include

  • What is the direction going to be for the FTSE 100 in the UK
  • Is it wise to invest in the Karachi (Pakistan) Stock Market?
  • Is China still a good investment?

In order to answer these questions we need to take a global view of stock market performance.

As regular members will know I perform a stock market analysis only at points where I believe the direction of the stock market will change.  Sometimes I add analysis to confirm my original hypothesis.

My regular analysis usually focuses on the US Markets (SP-500, Russell 3000, Dow Jones Industrials).  The reason for this is I trade these markets actively and perform this research regularly for my own trading strategy and decisions.  Why do I trade US?

  • Low Costs
  • Different timezone – I can trade in the evening
  • Great News Sources
  • Excellent discount brokers
  • Extremely liquid and more dynamic than many European Markets

The Global View of the Stock Market

However, I know that many of you trade different markets, the site membership consists primarily of people from the USA, India, UK and Germany.  But many other nationalities are also represented.  What a multicultural bunch we are.  I am an Englishman living in Germany trading the US markets.

To compare the major stock market indexes, I jumped over to Yahoo Finance and plotted them all on the same chart.

I plotted the chart in a way that shows a similar starting point ; the bottom of the global financial crisis March 2009.  This is a good starting point as nearly all indexes crashed horribly at the same time.  Also as the comparison chart above does not show values but percentage change, March 2010 is the perfect point.

What the Global Markets have in common

Upon initially viewing the chart you can see a number of important similarities.

  1. In general they move in the same direction
  2. Although, for example,  an individual day may have a positive result for the Sensex and a negative result for the FTSE, we clearly see that major fluctuations occur in a synchronized way.   Perhaps due to the fact that global news of serious macroeconomic significance ripples through the markets as they open for trading, causing the “Big Money”  to make market corrections.
  3. There are key pivot points in the global economy where all market will change direction at the same time.  March 2009 (direction up),  June 2009 (direction) July 2009 (direction up) April 2010 (direction) and so on.

Performance is the difference in the Global Markets

We can plot on the chart some of the key global market reversals as previously discussed.  But, it is also important to notice that although the markets are roughly synchronized, the momentum that some indexes carry into the trend are a lot stronger in some indexes. For example, the Sensex (India) exploded upwards in March 2009 for an 80% increase in just 4 months, leaving other indexes behind.  Very dynamic!

Also look at the trend lines for the last 3 months.

 

Stock Market Direction & Performance since the Financial Crisis

  1. Sensex – The Sensex is by far the best performer out of all the indexes, it is currently in an intermediate up trend and is challenging to move to new “post-crash” highs.  It has doubled in worth to over over 100% since March 2009.
  2. Hang Seng – The second best performer with a circa 65% increase since March 2009.  The index peaked in November 2009, and has been in a  slow shallow down trend since then.
  3. Standard & Poors 500 – Peaked in May 2010 having increased 77%, but has since slipped back to 58% – our third best performer.
  4. FTSE 100 – Also peaked in May 2010 and with a similar pattern to the US markets, but unfortunately a much poorer recovery – the fourth best performer managing only a 40% increase.
  5. Nikkei 225 – Japans flagship index has only managed a meager 24% improvement.  It is by far the worst performer and is currently in a very solid down trend.

The Long Term View of the Markets

Of course this recovery league table we have here has to be considered within the bigger picture.  For example :

  • How far did the indexes drop during the crash?
  • How much of that loss have they recovered?
  • How much more volatile is one stock market index versus another.

Here you can see pre-crash and post-crash view (in this chart I have also included the German DAX)

Clearly no index has fully recovered, and in fact all are still in a long term down-trend, although India is closest to a full recovery.

Conclusion of the Global Stock Market Analysis

So in the short term we see that markets fluctuate and show key reversals at very similar points in time, however some markets are significantly out-performing others and exhibit very different volatility characteristics.

So there you have it, a stock market analysis of the key indexes.  You may be tempted to think “Well the Sensex and the Hang Seng have performed the best, I should invest in those markets”.  Well logically that might be true, but there are a few things to consider before you do.

  • Volatility – the emerging markets might be performing well, but in the bad times the down-side (potential loss) is also very punishing
  • Market Accessibility – can you get high quality Technical Analysis software that provides the right detail and fundamentals to enable you to trade the Chinese or Indian markets?
  • What are the transaction costs?
  • Is there sufficient liquidity in the stock to enable your to get out when you need to?
  • How are the companies financially regulated, are they majority government owned?

If you want to create your own Global Stock Market Analysis, use this link and change the time-frame on the chart. Yahoo Finance

Good Luck

Barry

 

1 COMMENT

  1. The fact that most of the indices have not fully recovered and are in a slow long term downtrend needs reliable day to day info on economic news and events that will affect the recovery of the markets to enable proper decisions to be made when making trade and investment moves in the market.

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