Correlation between DAX & S&P500
The S&P500 index is considered a valuable barometer of the US equity market and is followed as an indicator for the strength of the major industries represented in it. On the other side of the Atlantic, the DAX mirrors the performance of the German stock market.
The chart below shows the strong correlation between the two leading indices. When DAX and S&P500 don’t move in tandem, this is often seen as a price anomaly, and often a trading opportunity.
DAX - S&P500 price correlation
Differences between DAX & S&P500
In order to evaluate how the markets will move in case of a price anomaly it is important to know the unique characteristics of each index and the region and industries it represents.
- Constituent companies
The US economy is a heavily consumer-driven economy with S&P500 representing IT, financials and health care up to roughly 50%. Germany, on the other hand, is an export-driven economy, with only a small technology industry. In the case of DAX, it is chemicals that have the highest weighting.
- Total-return vs. price-return index
Total-return indices measure the strength of their constituent companies assuming that all dividends are re-invested. DAX, for example, is a total-return index. Contrary to that, S&P500 is a price-return index, meaning dividends are not included in the calculation of the return. This is one of the reasons that helps DAX push higher compared to non-total-return indices.
When the prices of indices diverge, it is important to take into consideration the above factors before deciding which side of the market you will trade. The most popular way to trade indices is via CFDs, also known as Contracts for Difference. These financial instruments allow traders to profit both from rising and falling prices, by opening long (buy) positions, if you think an index will rise or short (sell) positions, if you think the index will fall.
Indices trading example
Going long on DAX
Let’s suppose that the DAX is currently trading at 12,427.20. Your research suggests that the market sentiment is positive towards DAX and your technical indicators give you an entry signal. You decide to buy 1 Lot. This position size equals €1 of profit or loss for every point of movement in price.
Two days after, the DAX has indeed pushed higher and it is now trading at 13,120.20. Your profit is calculated by deducting the opening price from the closing price: (13,120.20 - 12,127.20) x €1 = € 693.
Note that in the above example profit and loss is calculated in the currency of the region that the index is tied to. But no reason to worry how that translates in the currency of your trading account. At ThinkMarkets, the profit and loss is automatically converted in your currency in real-time based on the current exchange rate.