How to Use Stock Market Indices for Basic Trend Analysis

Before we dive into today's article, I'd like everyone to consider this: Why is it that when we turn on a financial news channel or visit any news website, we often see reports on the rise and fall of stock market indices in major markets? The average person might think, "Well, it's financial news, so of course they report index numbers." But for investors, these indices are actually one of the compasses that indicate many things and help adjust investment strategies to align with market trends. Today, we'll help you understand this better.

What are stock indices and how do they represent the market? 

Stock indices are indicators that reflect the movement of stock prices in the stock market. They represent the average price of a selected group of stocks, providing an overview of the entire stock market. These indices reflect changes in most stock prices in the market and are used as a guide for investment decisions. However, it's important to understand that indices only provide an overall picture, and some individual stocks may move differently from the index's direction.

Stock indices are crucial tools that reflect the overall picture of the stock market by showing the movement of most stock prices in the securities market. An index is calculated from the total market value of all stocks included in that index compared to the value on the base date. This allows investors to see the overall market trend, whether it's bullish or bearish.

When an index rises, it indicates that most stock prices in the market are increasing, reflecting investor confidence and a good economic climate. Conversely, if an index declines, it reflects that most stock prices are decreasing. However, indices only provide an overview, and some individual stocks may move contrary to the index.

Which important indices should we keep on our list?

Many investors follow stock market indices as essential tools to measure the overall picture and direction of financial markets. Each index reflects the performance of a group of stocks or securities representing a specific market or industry. Here's a list of important indices you should know:

Major Global Indices 

• S&P 500 (United States)

• Dow Jones Industrial Average (United States)

• NASDAQ Composite (United States)

• FTSE 100 (United Kingdom)

• DAX (Germany)

• CAC 40 (France)

• Nikkei 225 (Japan)

• Shanghai Composite (China)

• Hang Seng (Hong Kong)

Additional information : The S&P 500 consists of 500 large-cap companies listed on U.S. stock exchanges, with a diverse industry distribution: 27% information technology, 15% healthcare, and 11% each for consumer discretionary and communication services. The Dow Jones includes only 30 leading companies and is calculated using a price-weighted method rather than market capitalization. It has a fairly good industry distribution, with the highest proportions in industrials (21%), financials (18%), consumer services (17%), and healthcare (15%). The NASDAQ Composite is notable for its technology focus, with technology stocks making up 52% of the index and consumer stocks 16%.

Thai Stock Indices 

• SET Index

• SET50 Index 

• SET100 Index

• MAI Index

Industry Group Indices 

• MSCI World Information Technology Index

• S&P Global 1200 Health Care Index

• S&P Global 1200 Consumer Staples Index

• S&P Global 1200 Financials Index

• S&P Global 1200 Energy Index

How to read and interpret stock market indices

Reading and interpreting stock market indices is a skill that helps investors better understand market conditions. Start by observing the direction of index movement—whether it's rising, falling, or stable—which reflects the overall market situation at that time. Comparing index values across different periods helps to clearly see market developments, such as day-to-day, weekly, or monthly comparisons. Additionally, examining long-term upward or downward market trends from index charts provides a better understanding of the market's main direction. Using indices in conjunction with other technical tools, such as moving averages or RSI (Relative Strength Index), can provide a more comprehensive analytical perspective.

Examples of market trend analysis 

We can use stock market indices to help analyze market trends and assess overall market conditions. We'll provide clear examples in this section.

Long-term trend analysis 

• Let's say we examine a particular index over the past 5 years and find a consistent upward trend. The lowest point was 800 five years ago, and it's currently at 1,200 points. The index continuously creating new highs and higher lows indicates an uptrend (for long-term trading).

Medium-term trend 

• Looking at the past 6 months, we might find that the index we're examining has been fluctuating up and down within a narrow range. This could indicate a sideways trend or no clear direction in the medium term.

Short-term trend 

• In the past month, let's assume the index has slightly adjusted upward, trading volume has increased, and the RSI is at 65, which hasn't yet reached the overbought level of 70. This information suggests a short-term uptrend.

In-depth analysis

If the above example were an analysis of the SET50 (Stock Exchange of Thailand 50 Index), we could compare it to the SET Index. We might infer that, compared to the SET Index, the SET50 has performed better over the past month. This indicates that large-cap stocks have a more positive trend than mid and small-cap stocks. This is a basic example of how to use stock indices for analysis.

How can we analyze stock indices along with fundamental factors? 

Analyzing stock indices in conjunction with global economic fundamental factors is an effective method for predicting market trends. Investors should focus on key economic indicators such as - 

GDP growth rate, which reflects the overall economic picture, Inflation rate, indicating changes in the price levels of goods and services, Consumer and producer confidence indices, which are important indicators reflecting future economic outlooks, Lastly, the unemployment rate, which shows the state of the labor market.

Monitoring these figures from major economies like the United States, China, and Europe will help investors better understand global economic directions and predict potential impacts on stock indices. In particular, analyzing the relationship between these economic figures and past stock index movements will enable investors to assess trends more accurately.

Recap

Before concluding this article, here are 8 secret tips for using stock indices to analyze market trends:

1. Don't look at just one index  - Compare multiple indices for a well-rounded perspective, such as viewing the SET Index alongside SET50 and MAI Index.

2. Use multiple time frames - Analyze short, medium, and long-term trends to get a clearer overall picture.

3. Observe relationships between indices - Sometimes indices may move in opposite directions, which could indicate market changes.

4. Use indices with other technical tools - Such as RSI or MACD to confirm signals.

5. Keep track of fundamental factors as well - Economic news, monetary policies, or significant global events all affect indices.

6. Be cautious during special periods - Such as earnings announcement periods or index adjustments, which may cause unusual index volatility.

7. Remember that an index is just an average - Some stocks may move very differently from the index, so in-depth analysis at the individual stock level is also necessary.

8. Practice and gain experience - Reading and interpreting indices requires practice and accumulated experience. Don't get discouraged if you're not accurate at the beginning.