Section 10 - Chapter 2 - Indexes - CMT Level 1 2025 Short Notes

Section 10 - Chapter 2 - Indexes - Presented by Rohan Sharma - The CMT Coach - Chartered Market Technician CMT Level 1 Study Material - CMT Level 1 Chapter Wise Short Notes - CMT Level 1 Course Content - CMT Level 1 2025 Exam Syllabus

1. Chapter 2 - Indexes SECTION 10 - COMPARATIVE MARKET ANALYSIS Presented By : This Content is Copyright Reserved Rights Copyright 2025@PTAIndia

2. Agenda What Are Indexes? Benefits for Investors Other Indexes Index Construction and Weighting Survivorship Bias Using Indexes Data Types Available What Does a Technical Analyst Need? This Content is Copyright Reserved Rights Copyright 2025@PTAIndia

3. Indexes Presented By : This Content is Copyright Reserved Rights Copyright 2025@PTAIndia

4. Indexes Key Facts 1. Benchmarking – Market indices serve as a reference point for evaluating stock or portfolio performance. 2. Market Sentiment – Indices reflect the overall market trend, helping traders gauge bullish or bearish momentum. 3. Trend Confirmation – If individual stocks align with the broader index movement, it strengthens technical signals. 4. Risk Management – Helps traders assess market volatility and adjust strategies accordingly. 5. Divergence Analysis – Comparing stock movement with the index can indicate strength or weakness in a stock.

5. Indexes Cheat Sheet Concept Explanation Moving Averages (MA) Use indices' MA to confirm market trends (e.g., S&P 500 crossing 200-day MA signals a long-term trend). Relative Strength Index (RSI) RSI of an index can indicate overbought (>70) or oversold (<30) market conditions. Support & Resistance Key levels on the index chart help predict market behavior. Correlation Analysis Stocks moving with/against an index can confirm strength or weakness. Market Breadth Indicators Measures like advance-decline ratio show the depth of market moves.

6. Indexes Interpretation 1. Bullish Market – If an index is trending upwards, it signals strength, and individual stocks have a higher probability of rising. 2. Bearish Market – A downward-trending index suggests selling pressure and weaker stock performance. 3. Divergence – If a stock is rising while the index is falling, it may indicate relative strength, and vice versa. 4. Breakouts & Reversals – When an index breaks key levels, it often sets the tone for broader market trends. 5. Sector Rotation – If an index shows strength but a sector lags, it suggests shifts in capital flow.

7. Common World Stock Market Indexes Presented By : This Content is Copyright Reserved Rights Copyright 2025@PTAIndia

8. Common World Stock Market Indexes Key Facts 1. Definition – A stock market index measures the performance of a group of stocks representing a particular market, sector, or economy. 2. Benchmarking – Investors use indexes to compare portfolio performance and market trends. 3. Market Sentiment – Index trends reflect economic conditions, investor confidence, and overall market health. 4. Types of Indexes – o Broad Market Indexes (e.g., S&P 500, MSCI World) track entire markets. o Sector-Specific Indexes (e.g., Nasdaq 100 for tech) focus on particular industries. o Regional Indexes (e.g., Nikkei 225 for Japan, FTSE 100 for the UK) track specific country economies.

9. Common World Stock Market Indexes Key Facts 5. Weighting Methods – o Market Cap-Weighted (e.g., S&P 500, Nasdaq 100) – Heavily influenced by larger companies. o Price-Weighted (e.g., Dow Jones, Nikkei 225) – Higher-priced stocks have more impact. o Equal-Weighted – All stocks contribute equally, regardless of size. Economic Indicator – Stock indexes often lead economic trends, predicting booms and recessions.

10. Common World Stock Market Indexes Cheat Sheet Index Country/Region Description S&P 500 USA Tracks 500 large-cap U.S. companies, considered a key economic indicator. Dow Jones Industrial Average (DJIA) USA Price-weighted index of 30 blue-chip stocks. Nasdaq 100 USA Tech-heavy index tracking 100 largest non-financial firms. FTSE 100 UK 100 largest companies on the London Stock Exchange. DAX 40 Germany Tracks the 40 largest German companies on the Frankfurt Stock Exchange.

11. Common World Stock Market Indexes Cheat Sheet Index Country/Region Description CAC 40 France Represents the 40 most significant stocks on the Paris Bourse. Nikkei 225 Japan Price-weighted index of 225 major Japanese stocks. Hang Seng Index Hong Kong Tracks the performance of 80 major companies in Hong Kong. Shanghai Composite China Covers all stocks traded on the Shanghai Stock Exchange. Sensex (BSE 30) India Index of 30 top companies on the Bombay Stock Exchange. Nifty 50 India Tracks 50 major stocks on the National Stock Exchange of India. MSCI World Global Measures stock performance across 23 developed countries.

12. Common World Stock Market Indexes Interpretation & Analysis 1. Bullish Market – If major indexes are rising, investors are confident, and economic growth is likely. 2. Bearish Market – A downward trend suggests declining confidence, possible recessions, or market corrections. 3. Sector Rotation – If tech-heavy indexes (Nasdaq 100) outperform, investors favor growth stocks. If Dow Jones rises, blue-chip stocks are preferred. 4. Global Trends – International indexes moving in sync may indicate macroeconomic events (e.g., inflation, interest rate hikes). 5. Correlation & Diversification – Some indexes are highly correlated (S&P 500 & Nasdaq), while others (Nikkei & S&P 500) may move differently, helping with

13. Other Important Market Indexes Presented By : This Content is Copyright Reserved Rights Copyright 2025@PTAIndia

14. Other Important Market Indexes Key Facts 1. U.S. Dollar Index (DXY) • Measures the value of the U.S. dollar relative to a basket of six major currencies (EUR, JPY, GBP, CAD, SEK, CHF). • Indicator of global risk sentiment, inflation trends, and Federal Reserve policy. • Impact: A strong dollar negatively impacts commodities (oil, gold) and emerging markets, while a weak dollar benefits exports and risk assets. 2. CRB Index (Commodity Research Bureau Index) • Tracks the prices of 19 global commodities (energy, agriculture, metals). • Used for identifying inflation trends and commodity price cycles. • Impact: Rising CRB index signals inflationary pressures; falling CRB index suggests deflationary risks.

15. Other Important Market Indexes Key Facts 3. Real Estate Indexes (S&P/Case-Shiller, REIT Indexes) • Tracks property prices and Real Estate Investment Trust (REIT) performance. • Indicator of housing market strength and real estate investment trends. • Impact: Rising values indicate economic growth and wealth creation, while falling values suggest market weakness or economic slowdown. 4. Baltic Dry Index (BDI) • Measures global shipping rates for raw materials like coal, iron ore, and grain. • Indicator of global trade demand and economic activity. • Impact: A rising BDI suggests strong global demand, while a falling BDI signals weaker economic conditions.

16. Other Important Market Indexes Key Facts 5. Bond Market Indexes (U.S. Treasury Yield, Bloomberg Barclays Bond Indexes) • Tracks government and corporate bond performance. • Indicator of interest rates, inflation expectations, and economic stability. • Impact: Rising bond yields signal higher interest rates and inflation concerns; falling yields indicate economic slowdown and investor risk aversion.

17. Other Important Market Indexes Cheat Sheet: Key Indexes & Their Market Impact Index Measures Indicator of Impact on Markets U.S. Dollar Index (DXY) USD vs. major currencies Global risk sentiment, Fed policy Strong USD → lower commodities, weaker emerging markets; Weak USD → higher exports, stronger risk assets CRB Index Commodity prices Inflation trends, economic demand Rising CRB → inflation; Falling CRB → deflation, economic slowdown Real Estate Indexes Property values, REITs Housing market strength, economic trends Rising values → growth, wealth effect; Falling values → economic stress Baltic Dry Index (BDI) Shipping rates for raw materials Global trade demand, economic activity Rising BDI → strong trade demand; Falling BDI → weak economic growth Bond Indexes Government & corporate bond performance Interest rates, inflation, risk sentiment Rising yields → higher interest rates; Falling yields → risk aversion, lower borrowing costs

18. Index Construction & Weighting Presented By : This Content is Copyright Reserved Rights Copyright 2025@PTAIndia

19. Index Construction & Weighting Key Facts 1. Definition – Index construction refers to the methodology used to select, weight, and update components in a stock, bond, or commodity index. 2. Purpose – Helps investors track market performance, benchmark portfolios, and analyze trends. 3. Selection Criteria – Indices include companies or assets based on factors such as market capitalization, liquidity, sector representation, or price levels. 4. Weighting Methods – Determines how each component impacts the index value. The most common methods are market capitalization-weighted, price-weighted, equal-weighted, and fundamentally weighted. 5. Rebalancing & Reconstitution – Periodic updates ensure the index reflects the current market. This may involve adding/removing companies or adjusting weightings.

20. Index Construction & Weighting Cheat Sheet: Common Index Weighting Methods Weighting Method Description Examples Pros Cons Market Cap-Weighted Components are weighted based on market capitalization. Larger companies have more influence. S&P 500, Nasdaq 100, MSCI World Reflects actual market impact; Stable and widely used. Large companies dominate, reducing diversification. Price-Weighted Components are weighted based on their stock price. Higher-priced stocks have more influence. Dow Jones Industrial Average, Nikkei 225 Simplicity; Long-standing history. Ignores market size; Stock splits can distort index value. Equal-Weighted Every component has the same weight, regardless of size. S&P 500 Equal Weight Index, Nasdaq Equal Weight Greater diversification; Reduces large-cap bias. Requires frequent rebalancing; Higher transaction costs.

21. Index Construction & Weighting Cheat Sheet: Common Index Weighting Methods Weighting Method Description Examples Pros Cons Fundamentally Weighted Weighting based on financial metrics like earnings, revenue, or dividends instead of price or market cap. FTSE RAFI Index, WisdomTree Dividend Index Focuses on fundamentals; Less volatile than market-cap indexes. Complex methodology; May lag in fast-changing markets. Custom/Hybrid Weighting A mix of different weighting methods, often incorporating rules-based strategies. ESG Indexes, Smart Beta ETFs Can be tailored to investment goals; Captures different factors. Complexity; Requires more active management.

22. Index Construction & Weighting Interpretation & Market Impact 1. Market Cap-Weighted Indexes • Heavily influenced by large-cap stocks (e.g., Apple, Microsoft in the S&P 500). • Growth in mega-cap stocks can drive overall index performance. • Market corrections affect large caps more, leading to volatility. 2. Price-Weighted Indexes • Higher-priced stocks (e.g., UnitedHealth in the Dow) dominate movements. • Stock splits can reduce a company’s index influence without changing fundamentals. • Less representative of overall market trends.

23. Index Construction & Weighting Interpretation & Market Impact 3. Equal-Weighted Indexes • Small and mid-sized stocks have the same influence as large-cap stocks. • Tends to outperform in broad market rallies but underperform in downturns. • Requires regular rebalancing, leading to higher turnover and costs. 4. Fundamentally Weighted Indexes • Prioritizes companies with strong financials over market sentiment. • Can reduce overvaluation risks seen in market-cap indexes. • May underperform during speculative market booms.

24. Index Construction & Weighting Interpretation & Market Impact 3. Equal-Weighted Indexes • Small and mid-sized stocks have the same influence as large-cap stocks. • Tends to outperform in broad market rallies but underperform in downturns. • Requires regular rebalancing, leading to higher turnover and costs. 4. Fundamentally Weighted Indexes • Prioritizes companies with strong financials over market sentiment. • Can reduce overvaluation risks seen in market-cap indexes. • May underperform during speculative market booms.

25. Index Construction & Weighting Comparison: Market Cap vs. Price vs. Equal vs. Fundamental Weighting Factor Market Cap-Weighted Price-Weighted Equal-Weighted Fundamentally Weighted Main Influence Largest companies Highest-priced stocks All stocks equally Companies with strong financial metrics Bias Large-cap dominance High-price stock dominance Mid- and small-cap exposure Value stocks and fundamentals Rebalancing Needs Low Low High Medium Volatility Moderate Moderate-High High Moderate-Low Best For Passive investing, tracking market trends Traditional blue-chip focus Diversification, small-cap exposure Long-term, value-based investing

26. Survivorship Bias in Index Construction Presented By : This Content is Copyright Reserved Rights Copyright 2025@PTAIndia

27. Survivorship Bias in Index Construction Key Facts About Survivorship Bias in Indexes 1. Excludes Failed Companies – Indices typically remove underperforming or bankrupt companies (e.g., Lehman Brothers in 2008), making past performance seem more stable. 2. Overstates Historical Returns – Since poor-performing companies are removed, backtests and historical analyses may show an upward bias. 3. Affects Investment Strategies – Investors basing strategies on index data might assume stocks always recover, underestimating the risk of failure. 4. Frequent in Market-Cap Weighted Indexes – Large-cap indexes like the S&P 500 regularly replace declining companies with stronger ones, leading to an illusion of consistent growth. 5. Seen in Mutual Fund & ETF Performance – Many fund rankings remove closed or underperforming funds, making averages look better than reality.

28. Survivorship Bias in Index Construction Cheat Sheet: Effects of Survivorship Bias in Indexes Aspect Effect of Survivorship Bias Example Historical Performance Returns appear better than reality S&P 500 looks like it always grows, but past failures are removed. Risk Perception Understates the probability of stock failures Investors assume most companies recover, ignoring those that went bankrupt. Stock Selection Focuses only on successful stocks, ignoring past failures Looking at past tech winners (Amazon, Apple) without considering dot-com bust stocks. Market Perception Creates an illusion of a strong and resilient market The index always removes weak companies, making downturns seem less severe.

29. Survivorship Bias in Index Construction Interpretation & Real-World Impact 1. Indexes Appear More Stable Than Reality o Since failing companies are removed, the index looks like it only moves up over time. o Example: The S&P 500 has replaced over 1,000 companies since its inception, yet it appears to be a consistently strong performer. 2. Misleading Investment Strategies o Backtesting strategies on an index with survivorship bias might lead to overly optimistic expectations because past failures are ignored. 3. The Hidden Risks in Stock Markets o Companies like Enron, Lehman Brothers, and Bear Stearns were once major players but collapsed and were removed from indexes. o Investors assuming all large-cap stocks "always recover" may overlook real risks.

30. Survivorship Bias in Index Construction Comparison: Survivorship Bias vs. Reality in Indexes Factor Survivorship-Biased View Reality Stock Market Growth Always upward trend Includes failures, crashes, and corrections Risk Assessment Lower perceived risk Companies can and do fail Backtest Results Overstates long-term returns Real performance includes losses Index Composition Only strong survivors remain Many weak stocks were removed over time How to Avoid Survivorship Bias in Investing ✔ Analyze Delisted or Bankrupt Stocks – Looking at past market failures helps gauge real risks. ✔ Use Total Market Indexes – Broad-based indexes (e.g., Wilshire 5000) include more stocks, reducing bias. ✔ Compare Historical Constituents – Study past S&P 500 lists to see which companies dropped out.

31. Chapter 3 - Fixed Income /Bonds SECTION 10 - COMPARATIVE MARKET ANALYSIS Presented By : This Content is Copyright Reserved Rights Copyright 2025@PTAIndia