How to Analysis Indian Stock Market by Looking at the Dow Jones (2 September 2024)

The Indian stock market and the US stock market, represented by the BSE Sensex and the Dow Jones Industrial Average (DJIA) respectively, have a moderate positive correlation. This means that when one market goes up, the other tends to follow suit, but not always to the same degree. By analyzing the movements and trends in the DJIA, investors can gain valuable insights into the Indian stock market.

Correlation Between Indian and US Stock Markets

Over the past decade, the correlation coefficient between the monthly returns of the Sensex and the DJIA has been around 0.54. This indicates a moderate positive relationship between the two markets. In the last three years, this correlation has strengthened to about 0.64.

Factors Affecting the Correlation

Several factors can influence the correlation between the Indian and US stock markets:

• Global economic conditions
• Commodity prices, especially oil
• Currency exchange rates
• Investor sentiment and risk appetite

How to Use the Dow Jones to Analyze the Indian Market

1. Monitor the DJIA’s performance: Keep a close eye on the DJIA’s daily movements, weekly trends, and monthly performance. Look for patterns and correlations with the Sensex.
2. Analyze the DJIA’s sectors: Understand the top sectors in the DJIA and how they are performing. This can provide insights into the corresponding sectors in the Indian market.
3. Watch for global events: Major global events, such as economic crises, political instability, or trade wars, can impact both the US and Indian stock markets. Stay informed about these events and their potential effects.
4. Consider the time difference: Due to the time difference between India and the US, the Indian market often reacts to the previous day’s performance of the DJIA. Use this information to anticipate potential movements in the Sensex.
5. Diversify your portfolio: While the Indian and US stock markets are correlated, they are not perfectly aligned. Diversifying your portfolio across different markets and asset classes can help mitigate risk and optimize returns.

Limitations of Using the Dow Jones for Indian Market Analysis

• The correlation between the two markets is not perfect, and there may be instances where they move in opposite directions or at different magnitudes.
• The Indian market is influenced by domestic factors such as government policies, inflation, and interest rates, which may not be directly reflected in the DJIA.
• The DJIA is a price-weighted index, while the Sensex is a market capitalization-weighted index. This difference in calculation methodology can lead to varying results.
• The Indian market has its own unique characteristics, such as the presence of large family-owned conglomerates and the influence of foreign institutional investors, which may not be fully captured by the DJIA.