Analysis of US stock indices

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Among the stocks that can be traded today, there are of course stocks but also stock indices. The American stock indices are among the most popular indices of the moment and we propose you an article entirely dedicated to these stocks. In this page, we will present you in details the three biggest stock market indexes of the US market, namely the Dow Jones Industrial Average, the S&P 500 and the Nasdaq. We will discover together what each of these indexes represents and how to make a good analysis of them.  

Analysis N°1

All the news of the American market concerning in particular the economic rules of the country and their evolutions/changes.

Analysis N°2

The value of the U.S. dollar against other currencies because it will influence the competitiveness of companies that sell their products and services abroad or that import a lot of raw materials.

Analysis N°3

The news of the companies that make up the indices and that have the most weight in the calculation of the value of these indices. This may include their annual financial results, acquisitions, partnerships or mergers, or other significant news.

Analysis N°4

US economic growth as a whole, with the main indicators published each quarter and each year, including consumer confidence indicators and durable goods orders, being the most evocative.

Analysis N°5

Of course, the economic and geo-political environment of the country will also be taken into account, with the relations of the United States with the other world economic powers or the conflicts which can slow down the growth of its companies and its positioning on the international market.

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Why know the US indices well before analysing them?

First of all, let's remember that the American stock market indexes, although very well known and particularly popular in the eyes of investors, are still often misunderstood and yet present specificities that it is important to know before starting to analyze them.

These stock market indices, which are quoted between the European and Asian sessions, are indeed at the heart of the attention of the international markets, but their operation and calculation methods differ greatly from those of the more familiar European indices.

However, let us remember that investing in the stock market is in itself a risky activity and that this risk will be even greater when this activity is carried out without the right knowledge. The analysis of these indexes indeed requires to know the logic and thus the elements which will influence their prices.

 

Introduction to the Dow Jones Industrial Average :

Let's start with a presentation of the American stock exchange index which is undoubtedly the most followed by the investors of the whole world. It is the DJIA or Dow Jones Industrial Average, created in 1896 and which is, therefore, the oldest stock market index in the USA but also the first world index.

The Dow Jones is still considered the benchmark stock market index of the New York Stock Exchange or NYSE. It includes the 30 largest market capitalizations in the country, hence the name DJIA 30.

As you will have understood, this stock market index is the symbol of the world's leading economy and the world's leading financial centre. Moreover, the Dow Jones Industrial Average is primarily intended to represent the American industrial sector as well as possible. It should also be noted here that other Dow Jones indices are listed in the USA, notably the DJTA, which specialises in the transport sector, and the DJUA, which specialises in the energy sector.

As for the calculation of this stock market index, it differs greatly from the calculation of the other world stock market indices and presents certain specificities. Indeed, the Dow Jones Industrial Average is not calculated by weighting the capitalizations of the companies that make it up, but by weighting the share prices of these companies.

Thus, the higher the price of a stock, the higher its weight in the index, and vice versa for stocks with a low price. This data is particularly important because, when you will carry out your analyses of this stock exchange index, you will have to understand that the companies whose news and results will influence the most on its price are not necessarily the most important market capitalizations as it is the case elsewhere but those whose share has the strongest quotation on the Stock Exchange

 

Introduction to the NASDAQ Composite Index and NASDAQ 100 :

Another stock market index that is becoming more and more important in the stock market is of course the NASDAQ index, which is much newer than the Dow Jones Industrial Average.

First of all, the NASDAQ Composite stock index is considered the benchmark index for the NASDAQ market. This term stands for National Association of Securities Dealers Automated Quotations. This market is only the second largest stock market in the world just after the NYSE, hence the importance of this index.

The NASDAQ Composite Index is a stock market index that includes thousands of stocks listed on the NASDAQ stock exchange. It is often confused with the NASDAQ 100, but it is important to distinguish between these two indices because the NASDAQ 100, as its name indicates, only includes 100 stocks corresponding to 100 major companies in the technology sector.

The NASDAQ stock market index has been gaining more and more importance on the international stock market in recent years, as it is largely composed of stocks from the Internet, computer and biotechnology sectors.

Whether it is the NASDAQ 100 or the NASDAQ Composite, these two American stock indices have the particularity of being particularly volatile. Their analysis and trading therefore requires the utmost caution and a certain level of experience.

 

Presentation of the S&P500 index :

Finally, we will now look at the S&P500 index, which is undoubtedly considered the most representative stock market index in the United States at the present time.

As its name suggests, this stock market index is composed of 500 large American companies, which makes it a more complex index to study, but also of major importance to investors around the world.

The name S&P500 also stands for Standard and Poor's, which is actually the name of the rating agency that calculates it. Unlike the Dow Jones Industrial Average, the S&P500 index is calculated by weighting the capitalizations and not the prices of the stocks that make up the index.

Also and in the same way as for the NASDAQ indices, there are derivatives of the S&P500 index such as the S&P100 which is logically more restricted and which is, as its name indicates, composed of the 100 largest companies of the S&P500.

 

Understand the calculation methods of these stock market indices in order to carry out the analysis:

Before you start analyzing one or more of these American stock market indices, it is important that you understand how they work and how they are calculated.

First of all, it should be remembered that the creation of a stock market index is defined by several elements, including the eligibility criteria for companies to be included in the index, the frequency of reallocations, i.e. the entry and exit of companies, which are usually annual, quarterly or rarely monthly, the calculation method aimed at ensuring the continuity of the index when a share enters or exits, the way in which these shares contribute to the index, and the way in which dividends and other securities transactions can affect the index price.

One of the most important elements to understand concerning the calculation of the American stock exchange indexes and the other world indexes concerns the method of calculation used. Here and as we have seen, the calculation differs and is sometimes made according to a weighting coefficient by capitalization or prices of the stocks that compose it.

 

How to perform a technical analysis of the US stock market indices?

In addition to the fundamental elements such as economic data or sectoral news and the companies that make up this index, it is of course also necessary to carry out a technical analysis of these stocks.

This analysis consists of a study of the stock market graphs of these indices and thus of the current and past price movements, so as to detect, thanks to technical indicators, configurations likely to cause a rise or a fall in their price. Among the indicators frequently used in this analysis are the MACD indicator, moving averages, supports and resistances, pivot points and Bollingerbands.

But be careful! This analysis is in no way a 100% reliable method to know how the price of an American stock exchange index will evolve. It must be used with the greatest caution and always in association with the fundamental analysis.

Frequently Asked Questions

How does a stock market index work?

The purpose of a stock market index, such as the American stock market indices, is to follow the evolution of a basket of shares by assigning a certain number of points to it. This number of points then evolves continuously. Each index has precise and specific methods of calculation which may or may not include dividends and which are weighted according to the market weight of the companies which make them up or according to the prices of their stock.

Which US stock index to invest in?

The choice to invest on one or the other of the American stock exchange indexes remains a question of investor profile but also of knowledge and experience. It is indeed essential to know well the functioning, the mode of calculation or the sectors represented by each stock exchange index before taking this decision.

What was the first stock market index in the world?

The very first stock market index created in the world was the Dow Jones Industrial Average or DJIA which was created in 1886. But in reality, its predecessor, the Dow Jones Transportation Average, which was created in 1884, was the very first to be created. The CAC 40 was created in 1987.

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