Intelligentguess

Analysis of Market Indices

Have an alternate thought process ? Would be glad to hear about it

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The Economist writes

According to Goldman Sachs, the latest jump in the Vix (a measure of stockmarket volatility) took it eight standard deviations from its average. If conventional models are correct, such an event should not have happened in the history of the known universe. Then again, the move in energy prices that caused the collapse last year of Amaranth, the hedge fund, was a nine standard-deviation event.

For clarity sake, the movement in the Vix index (spoken about above) during the last three months is as below:

Hmmm…… Two seemingly impossible events within a span of three months. Tells us something about our modelling skills. 

No wonder, the Sage of Omaha continues to rule the world of investments.

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The purpose of this note is not to force down any complex technical analysis / direction views. The simple visuals - allows you to conclude.

The study deliberately uses the Indian BSE-30 index versus the SP 500 ( the Indian NSE-50 was too much in line)

Visual I

In May 2004 the markets dropped (”crash” in Indian markets). ( BSE dropped from 6500 area to 4200 area while SP-500 had dropped from 1160 to 1065). Post the market drop - we can clearly see the SP-500 lending ( leading ? ) direction when the markets turned around.

Visual II ( since July 2006 )

Since July 2006 - both the Sensex and the SP-500 have been tracking each other.

Visual III ( S & P 500 movements since 1997 )

Conclude

• Pretty clear  that S&P 500 leads BSE-30 on market turns / direction
• In a rising market S&P  500 has too many resistances - and could rise slower than BSE-30
• However in a market thats falling  - S&P 500 would fall harder and longer initially - compared to BSE-30
• A lateral thinking solution for the short/ medium term- without having a view/bias towards the direction of market  - could be - “BUY” BSE ( or Nifty- NSE) and “Sell” S&P 500. ( i.e make a spread trade using one markets momentum against another)

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