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The Dow Last Night!

There seems to be a co-relation between the foreign & Indian markets. Some people have benefited from looking at the happenings of foreign markets & that's one tip we would give to all retail investors

Indian investors who keep an eye on Dow Jones are better at market predictions

Well, it's neither a movie title nor a bedtime story, but it certainly is a 'before-one-goes-to-sleep' strategy for Asian and Indian investors. How often have you bought the tip - the US markets were up last night? The recent ongoing era is not the first of its kind. We have come across the phrase - when US sneezes the rest of the world catches cold - more than once. So, how intense is this Domino effect?

To unearth this phenomenon, a co-relation between Dow Jones & Nikkei and Dow Jones & Sensex was computed. And after looking at the results, it was a no-brainer to understand, how some people made fortunes out of it.

A data since 2000 clearly shows the increasing trend of stock indices moving in tandem. For the year 2006, the co-efficient of correlation was as high as 0.94 between Dow Jones and the Sensex, while for Dow Jones and Nikkei it was 0.42. However, for the first time in the 21st century, in 2007, the co-relation between the Nikkei and the Dow Jones was negative, but at the same time the co-relation was positive between Indian and American markets. This year in 2008, the correlation has been 0.59 between the Sensex and the Dow Jones and 0.68 between the Nikkei and the Dow Jones, both of which are fairly significant.

A correlation of 1 means stocks are in lockstep, while minus 1 indicates stocks are moving in opposite directions. A reading of zero means they're not correlated.

While increased correlation also challenges the concept of diversification, fund managers are busy sharpening their pencil as to how to tackle this coupling theory. But for the retail investor we just have one piece of advice - don't forget to take this 'before-one-goes-to-sleep' pill, it seriously works!!!