Indices went through a fashionable phase about 30 years ago. At one stage, they were the defining story for market analysts. As most investors know, market fashions don’t last, and the market’s enthusiasm for analytical tools tends to be endless until it’s discovered they don’t work. If you’re a trader, your information needs to be based on something very like Search Engine Optimization, a range of key facts. Indices have their place in the schematic, but not as the sole source of materials to make judgment calls.

The applications of indices- The positives

Indices do in fact have direct, useful applications. Ironically, their most obvious uses are much better leads than they look. The mere fact that an index moves up or down on a particular day doesn’t necessarily mean much, but the elements within it are often good indicators of trends. If you know how an index is weighted, you can pin down useful facts and find good information.

For example:

One glance at an index can tell you a lot. If the Aerospace index goes solidly up, it means that the heavyweights in that index are on the move. That in turn means new business, and new business for a company like Boeing is good news for related industries, localities and subcontractors and related manufacturers. It’s like a Yellow Pages of investment opportunities.

There are some market products like commodities and index based investments like mutuals and Exchange Traded Funds, which are obviously hardwired into their various indices. Their indices have direct dollar-based applications to these types of investments, and you can predict, fairly accurately, without even looking, sometimes, what’s happened, simply on the basis of the size of the index move. Again, if the Aerospace index takes a hit, you already know that Boeing or one of the other giants has tripped over something and things are looking very iffy.

So indices do tell pretty accurate stories, within these frames of reference. That is quite specifically not the case with a range of other scenarios, which are much more individualized and behavioral.

The negatives and the misleading scenarios

If indices are pretty faithful reflections of some types of information, they can be very misleading in some contexts:

• A boom market will keep telling traders they’re on a good thing in any index they look at, until the inevitable downward correction/disaster happens.
• Indices are weighted. Good stocks in dismal indices aren’t exactly unknown, and vice versa.
• Investment performance and ROI aren’t well defined by indices except in the specific hardwired investment types.
• Indices cannot track issues with their component companies very effectively, if at all.
• Nobody was aware of the scale or depth of the financial market fiasco in 2007. The indices were all pointing straight up, when the biggest downward correction since 1929 hit.
• An index can’t tell you if the semi-literate/amnesiac CEO of your investment is trying to replay the Enron saga or not with their capital management until it’s too late.  

Yes, indices matter, and yes, they can provide useful information, particularly if you’re experienced enough a trader to be skeptical on principle. Otherwise, stick to your SEO approach to key data and other information. It’s a lot safer.

The U.K stock market was unusually down at 10^th of this month as Bank of England (BoE) refrained from increasing interest rates. In between, the position of the euro was unstable once again due to the deepening of the debt crisis in the euro zone owing to poor debt management plan.

The FTSE 100 index of the top U.K companies slipped .9% due to the BoE’s decision. Also, the value of the pound dipped .3% at $1.6063.

There have been rumors in the market that the BoE can possibly increase rates. The fact that the pound fared well against the dollar was basically due to this speculation. The possibility of higher rates allured the investors to the pound because of the better chances of return on interest bearing investments.

Probably, the rates won’t rise for the time being. The B0E’s quarterly economic forecast will be out pretty soon and there are high chances that it will predict a dwindling inflation rate. Therefore, the BoE is keeping its fingers crossed. Since there are high chances of growth in spite of the recent economic contraction in the U.K and inflation can decline for good, the BoE will possibly maintain a status quo for the time being. Currently, a lot of guesswork is being done on the growth rate and inflation. As the situation becomes clear, the BoE will decide if there is any need to raise the rate which is at a historical low of 0.5pc right now.

Amidst this development, the euro suffered another setback owing to the debt crisis in Portugal. The bond yields soared again in Portugal on 10^th January this year and the euro fell by .7% to $1.3630.Germany’s DAX also underperformed by being .4% lower. Even the possible chances of a merger between New York Stock Exchange and Deutsche Boerse did not help. This trend was also visible in Asia where Japan’s Nikkei 225 stock average dropped .1% to 10,605.65. Hang Seng index in Hong Kong also slipped 2% to 22,708.62. Worried by the developments in the continent, the Central Bank in China increased interest rate a number of times recently.

The downswing in Europe and the U.K in particular, was preceded by a slump in the Wall Street. Standard and Poor’s 500 futures declined .6% to 1311. Federal Reserve Chairman Ben Bernanke commented that he was contemplating austere fiscal policies to remedy the situation.

This morning shares appear to be down this morning over confusion of the Abu Dhabi bailout.

Five days ago, the Gulf state of Dubai initiated a panic around the world.  It was news that the state owned company Dubai World wanted a 6 month break from its debt repayments.  This raised the spectre of a meltdown in the luxury land of the rich, possibly leading to a panic that derailed the global econmic recovery.

Trading has been suspended since last week for the Eid al-Adha holiday.

A good sign that the world markets are feeling more optimistic is that the US dollar has lost ground against many other currencies, which has helped push the oil price up.  Despite the state of the US economy, investors still seek the safety of the greenback at times of crisis.

The Japanese prime minister Yukio Hatoyama has been talking about the situation also.  He has been talking to reporters in Tokyo that he “remains cautious over Dubai credit worries”.

Royal Bank of Scotland shares are down over 4% this morning at 33p, this has helped push the FTSE 100 down by 40 points to 5204.  It was annouced on Friday that RBS has organised more loans to Dubai World than any other bank.  Its still not clear how much of that debt remains on RBS’s books.  This will no doubt cause a worry for RBS investors this morning as has been relfected in their share price.