Short-term Price Movement in India’s Stock Market
This post was inspired by reader Soham Das (author of the Jump Up blog) who asked us to confirm his findings that in the short-term, the Indian stock market behaves opposite of the US market: it is momentum, not contrarian, driven.
A simple illustration…
The graph above shows the results of two trading strategies: one going long India’s S&P CNX Nifty index at today’s close if the market closed up today (green) and the other if it closed down (red), from 06/1995. Geek note: this is a proof of concept, so these results are frictionless (i.e. do not account for transaction fees or slippage).
Obviously, the Indian market demonstrates tremendous daily follow-through, or put another way, up days tend to be followed by up days, and vice-versa. But recall that this is the exact opposite of what we see in the U.S. stock market today (read more).
Compare that chart to the much longer test of the U.S. market from 1950 below.
Note how prior to about 2000, the U.S. market also demonstrated positive daily follow-through, but right around the turn of the century (grey dotted line), it flipped contrarian. Up days now tend to be followed by down days, and vice-versa.
India’s short-term momentum is seen in other indicators as well, such as RSI(2). Unlike the US markets, in India, high RSI(2) readings tend to be bullish, while low readings tend to be bearish.
I’m not sure (yet) how a U.S. based trader such as myself would best take advantage of this observation, but it’s interesting that in these interconnected financial markets, another of the world’s majors would behave so very differently.
Happy Trading,
ms
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Filed under: Follow-Through, International Markets | 5 Comments
My understanding is that most EM markets are momentum driven, while the more developed markets are mean reverting.
There is a practice prevalent here, where traders keep tracking how Dow is moving and then try to form the bias for the next day.
It might across a blasphemy, but I have always believed such practices as bunkum. US-India correlation is lower than India-Japan’s. The highest is, India-S’pore.
Soham
I wonder whether US Markets lead Indian Markets or vice versa. If we take S&P 500 and NIFTY whether SP leads NIFTY. Some times it appears optically and after the fact Indian markets are trying to pre empt US market sell offs/ pull backs by moving before hand. Especially what is the situation after Lehman Brothers with high levels of correlations ( Regime shifts ?)
RE to Soham and Gangineni: I’ve added it to my to do list to look at the India to US to India relationship similar to this series on East Asia markets:
http://marketsci.wordpress.com/2008/10/31/roundup-east-asia-vs-us-stock-market-performance/
Soham – will probably call on some of your expertise if that’s okay.
michael
hi,
infact i had left a comment in one of your earlier posts about the movements of the indian mkts and how they still follow the pre 1990 dow jones trending movements to a hilt.. inefficient market.. all the MA based strategies work awesomely with not too many whipsaws.. ive been making money since i discovered these strategies and this phenomenon. sometime in future they should reverse and then should work the other way around..
infact for a brief period of time in 2004-04 the dow had gone back to trending moves pre 1990.. but this didnt last for long.