Financial Market Forecast

  

Financial Market Forecast is basically concerned with forecasting the money as well as the stock market. Financial market forecasting is based on certain principles, theories and models to study the financial markets and predict what their future trend or course will be. Changes in stock prices are largely dependent on human opinions and expectations about the future performance of a stock or share. In fact, over expectations about the valuation of a security can lead to a stock market bubble which is sometimes the premonition of an imminent stock market crash.

Some of the deciding factors regarding Financial Market Forecast are :-

• Interest Rates
• Short Interest Ratio
• Corporate Profits
• Volume of Trading
• Index Prices
• Money Supply
• Industry Index Prices
• Mutual Fund Flows

In the case of the USA, the Dow Theory has been known as one of the best strategies for understanding and analyzing the stock market as it is the most efficient when used as a model of predictable forecast or a barometer for the stock market. The Dow Jones Industrial Average (DJIA), one of the most popular stock market indices experienced a downfall in the early stages of 2004 which was largely attributed to an increase in the Money Supply by the Federal Reserve in the USA which rose by crisis proportions; over $155 billion over a four-week period with an annualized rate of growth of 22.2%. The Technical Indicator Index (TII) studies incorporating the Short Term Index and Intermediate Term Index from the period January to May 2004 for the American equity markets showed largely negative or bearish trends for both the indices as they closed at 3.50 and 48.48 respectively. Whereas the short-term index is a useful predictor of equity markets over the short run, the intermediate term index serves as a warning system for trend changes of considerable magnitude. However, an analysis of the DJIA’s current price pattern versus the 2002 crash pattern shows it at a healthy level of about 13,600 points. Analysis for the Standard & Poor 500 (S&P 500) correlation to the VIX Ratio (measure of options volatility risk) for the early stages of 2004 show it a level of around 80.00 corresponding to about 1400 points on the S&P index. Other financial market forecasting indices could be the Federal Reserve’s monetary policy affecting the short term interest rates. Since 2004 when the Fed has increased money supply on an unprecedented scale, the interest rates have been largely constant. With the steady devaluation of the dollar, it has created opportunities for foreigners to buy as well as dump Treasuries.

There are also some other extraneous factors affecting the movement of the stock market such as the political situation and stability in the economy. Other determinants such as the government of a home country deregulating an industrial sector will have a positive impact on the stock market. War periods and periods of a stagflation and unemployment are likely to have telling effects on the stock market performance of the country and the economy may be headed towards a recession. With the onset of globalization and the integration of the world financial markets global factors such as recession in another country may also adversely affect the stock markets in the home country.

In the case of India, stock market forecasts would largely depend on the anticipation of the institutional investors and mutual funds about the future movements in the stock index prices of the major indices (Nifty of the National Stock Exchange-NSE and the Sensex of the Bombay Stock Exchange-BSE) of the country and the monetary policy adopted by the Reserve Bank of India (RBI). The Indian Stock markets are currently performing well and have breached both the 12,000 and 13,000 levels. Nifty is currently at a level of 4249.65 and that of the Sensex stands at 14,411.38. Stock market performance is largely seen as an indicator of the development of a particular country and over expectations about its performance could lead to stock market bubbles which might burst any time. Exchange rate performance also plays a role in the determination of the financial market forecasts. Under the floating exchange rate regime the Indian rupee has increased to about Rs. 41 against the US dollar which lowering the country’s import prices but is also hitting the exporters hard. In terms of the monetary situation of the country, RBI in a move to stifle the inflation has raised the reverse repo rate, the repo rate and the bank rate which has surprised many economists around the country as higher inflation rates also spurred higher growth rates. The reverse repo rates were raised from 5.25% to 5.5% at the end of January 2007. Currently, the Bank Rates and Cash Reserve Ratio set by the RBI are nearing 6% and 5% respectively.