The stock index is always the reflection of economy. When the econnomy goes up stock goes up.

The technology stocks are highly traded in NASDAQ and it reached all time hing during Y2K and .com boom .

After the bubble burst, NASDAQ did’t come to all time high.
So, if you are specific on IT , it is always better to have a look on NASDAQ too.

Thanks… got it! I had not considered the increase in purchasing capacity… hence the increase in demand.

@ rahul, yes its like getting back to square one and even worse. Like I mentioned in the post, that period in between, where you see the index rallying is when the federal reserve (like our RBI) cut interest rates and Bush cut taxes. Both are a boost to businesses. When fed cuts interest rates, credit is available at a cheaper cost. This will encourage businesses to lend more from banks and invest in expansions, new businesses, product development, IT, global ties etc., so businesses across industries did well. And this coupled with the policy which encouraged outsourcing, worked in favour of some businesses which benefitted by reducing costs and thereby increasing profits.

You mentioned about the gain of one company being the loss of another when it comes to a particular industry. That may not be the case if the market (demand/customers) itself is growing or if there is innovation, new products, new markets etc. What I mean to say is that, people don’t measure the worthiness of a stock by the company’s profitability alone, they take into consideration all these factors. So when a company in an industry does well, most other companies in that industry do well – that’s how a competitive environment works. Companies that don’t keep up wont survive and that will reflect in their stock prices.
You can analyse it yourself by looking at the stock prices of say banks in India. There are public and private sector banks, select a few from both, compare their stock performances with the company initiatives/news/performances.

Index value certainly depends on the trust that investor has. That’s why they talk about market sentiments. But not all investors invest based on a complete research of the company’s trustworthiness or factors mentioned above. Some of them invest on general news and ideas or simply by word of mouth. That mostly refers to individual buyers rather than Mutual funds or institutional buyers who hire people to do the same.

thanks for your comments.

From the graph it seems this Oct 2008, we are almost back to square one of 1998.

But I dont understand what prompted the index to play the game in between? Can I put it this way – The index value is directly dependent on the trust the investor has on the businesses?

But, isnt there a twist? A business is as good as the ultimate profit it has. And when that company tries for that extra bit of margin, investors feel its good business. But, the gain they make is the loss of their client. Hence when one business get better, another goes down.

BTW, the article was a very nice read. Thanks