Philippine Stock Exchange

Philippine Stock Exchange (PSEi) follows DJIA? Truth or Myth?

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Did you happen to notice that if DJIA goes up or down tremendously, the PSEi follows with it? Is this assumption correct? Is this a stock indicator we can base for PSEi? A study was made on the day by day trend of DJIA and PSEi to answer these questions.

Why did we compare PSEi to DJIA you say? Ummm… maybe because DJIA is one of the most recognized and major stock index in the US stock market. Concurrently, PSEi (or previously known as Phisix) is also the major stock index in the Philippine stock market. Well it seemed like a good idea to us actually hehe.

Let’s start on stating our criteria used for this study.

• Closing prices of both DJIA and PSEi were used.
• The trend is up if the current trading day’s price is higher than the previous day’s price.
• The trend is down if the current trading day’s price is lower than the previous day’s price.
• Previous day is the trading day before the current trading day. This does not consider weekends or holidays.
• When there is a holiday on a trading day in the US (DJIA) or Philippines (PSEi), there is no trend identified and so it is not included in the study.
• Since the US’s (DJIA) trading day goes first than Philippines’s (PSEi) trading day, the trend being compared is a day apart for these two indices (e.g. DJIA’s trend on 10/07/08 will be compared to PSEi’s trend on 10/08/08).

 And now, without further ado, the results of the study (see explanation below).

 

 

 

07/03/1997 to 10/08/2008

01/01/2004 - 10/08/2008

As you can see, the percentage that the trend was followed (from the DJIA to the PSEi) goes higher when the change in DJIA is also higher. The Change in DJIA column seen in the tables shows the minimum points change from the current trading day to the previous day. This can be trending up or trending down. The Follow column shows the number of trading days that PSEi followed the trend of DJIA and the Not column vice versa. Also shown is the Average Change PSEi (either positive or negative) when change is followed or not. Got it?!

Now, here is the exciting part. Two tables were presented (starting on 07/03/1997 and 01/01/2004) but I will focus on the latter one which is based on the last 5 years. If you look at a change in DJIA of 200 points, you can almost expect the PSEi to follow the trend (about 9 out of 10 times) where the change averaged about 65 points. Whoa!! That means if I see that DJIA closed at 210 points up before the Philippine stock market opens, I can expect the PSEi to go up also at a target of 65 points up. Nice!! Well that’s about 92% correct in the last 5 years. Remember the higher the change in DJIA, the more likely the PSEi will follow the trend. Also, you can see that the effect of DJIA in PSEi is even more significant in the last 5 years than since 1997. Even if we consider any change in DJIA (look at the 0 row in the Change column), the trend is leaning more to PSEi following DJIA at about 60% (more than half of the time).

Verdict: It can be pointed that DJIA is a good stock indicator for the PSEi.

This means that we have to watch out for any big spike up or down in DJIA before the Philippine stock trading day begins. This will help us make informed and calculated decisions on our trading whether it is a good time to buy or sell stocks (well that’s on another article we will be posting). Hope this helps.

Interesting facts:

• On the 01/01/2004 results, there was 1 trading day where the DJIA was changed more than 250 points but the PSEi did not follow. This happened just recently on 09/09/2008 where PSEi was -7.01 points down and the DJIA on 09/08/2008 was 289.78 points up.
• On the 07/03/1997 results, there were 2 trading days where there was more than 400 points of change on DJIA where PSEi did not follow the trend. The first is on 09/17/2001 which DJIA posted -684.81 points down. This is because of the tragic 09/11 bombings on 2001 (where there were no trading days from 09/11 to 09/16. PSEi was actually up 28.27 points on 09/18/2001. The other is on 0724/2008 where DJIA is up 488.95 points but PSEi was down 7.72 points.

 

 

 

 

 

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