Here is a nice little summary of some indicators such as tick
John
------------
Indicators Help Navigate Choppy Markets
By David Edwards
Special to TheStreet.com
4/21/00 12:06 PM ET
Any experienced pilot taking off into overcast skies will rely heavily on instruments to keep the plane pointed in the right direction.
A less experienced pilot generally operates under visual flight rules, which means he or she must be able to see other aircraft and the airport runway when it's time to land. More experienced pilots are trained to operate entirely by instruments. Indeed, completing the training requires navigating an airplane with special glasses that limit the pilot's vision to the cockpit. These glasses come off only on final approach.
At my money-management firm, we've developed a set of indicators that are not unlike a pilot's instruments on a foggy day. Though they'll never be as precise as an airplane altimeter, they can help us answer this very basic question: "Is today a good day to put money to work in the stock market, or should we wait until later this week, later this month, later this quarter?" That question is very appropriate this week as we try to determine whether last week's wipeout was a buying opportunity or just one of several legs to the downside.
On a single quote screen, we track data for both the New York Stock Exchange and the Nasdaq.
All Major Stock Market Indices
That includes the Dow Jones Industrials, Transports and Utilities, the Nasdaq Composite and Nasdaq 100, the S&P 500, S&P 100, S&P MidCap, New York Stock Exchange Composite, Value Line Geometric, Russell 2000 and Russell 3000. Some of these indices are narrowly defined (the Dow Industrials includes 30 large-cap companies) and some are very broad (Value Line Geometric includes about 5,000 companies).
If the narrowly focused indices are rising while the broader indices are flat to lower, the stock market lacks true buying conviction. As of Monday afternoon, the Nasdaq and tech-oriented indices had staged a dramatic rally, regaining two-thirds of Friday's losses. In the broader market, the S&P 100 gained 4.2%, vs. 3.3% for the S&P 500, and the Russell 1000 (the top 1,000 stocks by market cap) had gained 3.3%, vs. 1.2% for the Russell 2000 (the next 2,000 stocks by market cap). So we noted that this was a large-cap rally, with small-cap stocks struggling to stay in the game.
Advance/Decline Indicator
A strong market has better than three advancers for two decliners. On Monday, the averages closed sharply higher, but one stock was up for every two down, so it was not the best day to jump back in. The advance/decline line, in fact, has been negative on the NYSE for about one year, and negative on the Nasdaq for about five weeks, so this indicator has been flashing "neutral/bearish" for a while.
Volume
High relative volume confirms the overall market trend. For example, on days that the major averages are negative and volume is running 25% higher than in recent days, we usually know by 10:30 a.m. EDT where the market will end the day. Monday's sharp rally was confirmed by volume higher on both the NYSE and the Nasdaq, compared with the Friday selloff.
TRIN -- Trader's Index
This index combines both advance/decline and up-volume/down-volume indicators into a single, short-term money flow indicator. The formula is:
Advancing issues/declining issues and this number goes
in the numerator and is divided by
advancing volume/declining volume.
In general, a TRIN of less than 1 implies that money is moving into stocks, and greater than 1, out of stocks. At the close of trading Monday, the Nasdaq TRIN was 0.48, with 1,754 stocks up and 2,620 stocks down. However, up volume (1.42 billion) was 40% higher than down volume (1.01 billion).
How do we interpret this? We noted above that large-cap indices gained relative to small-cap indices. We also saw that on Monday, the establishment technology companies: Cisco (CSCO:Nasdaq - news - boards), Oracle (ORCL:Nasdaq - news - boards)and Applied Materials (AMAT:Nasdaq - news - boards) moved sharply higher, while the emerging tech companies (Red Hat (RHAT:Nasdaq - news - boards) and Inktomi (INKT:Nasdaq - news - boards) were flat to lower. We conclude that there still may not be any support for the emerging companies, but this may be an opportunity to pick up established companies at a discounted price. A TRIN in which advancing issues beat decliners and advancing volume beats declining volume would be very bullish indeed.
New Highs/New Lows
This indicator is another means of confirming or denying the action of the stock index averages. At Monday's close, there were 13 new highs and 145 new lows on the NYSE, and seven new highs and 612 new lows on the Nasdaq. As we noted with the TRIN and advance/decline line, select high-quality companies are moving higher but most companies are still moving lower.
Tick
This is the number of stocks trading on an uptick minus the number of stocks trading on a downtick. (An uptick is a trade at a higher price than the previous trade and a downtick is the same going in the opposite direction.) This is the shortest of short-term indicators. A positive tick index is good, a tick index greater than 200 is better and a tick index worse than minus 200 is bad. At Monday's closing, the NYSE tick was 661 and the Nasdaq tick was 620 -- a very strong close, indeed.
VIX -- Volatility Index
This indicator is derived from the implied volatility of at-the-money (those with strike prices at or very close to the security's market value) put and call options on the S&P 100 index. This indicator tends to rise sharply in times of market turmoil and fall when the market regains equilibrium.
The reason is that market makers price options higher in response to increased demand. Because market participants (mutual funds, individuals) have a bias toward owning stocks, demand for options tends to unequally focus on puts (which are used to hedge long stock positions). A sharply rising VIX usually results from a sharply rising demand for puts, which is usually typical of the end -- not the beginning -- of a market rout. Last Friday, the VIX soared to 40%, the highest level in weeks. However, by Monday afternoon, the VIX had fallen to 32%, confirming that the worst was over.
Sector, Currency and Foreign-Market Indices
We track a number of sector indices, including the Bank Sector, Morgan Stanley REIT, Biotechnology, Morgan Stanley High Tech 35, Utility Sector, TheStreet.com Internet Sector, Gold and Silver Sector and Oil. There are no hard-and-fast rules here. However, if we note one or more indices moving out of line with the rest, we pause to consider why this might be. For example, if a favorable move in interest rates might be confirmed by upward moves in the bank stock, real estate and utilities indices, we would expect the broader markets to follow.
Yield Curve
We track the 90-day, 5-, 10- and 30-year U.S. Treasury interest rates. This is a funny indicator. In normal times, flat to falling interest rates are supportive of overall stock market levels. However, in times of stress, falling rates are caused by money fleeing the stock market and taking safe haven in bonds. So the fact that on Monday the 30-year fell 2 2/32 (the yield rose from 5.78% to 5.91%) didn't bother us, because it represented a flight from the safety of bonds back into stocks.
You should be able to develop a similar quote window with data services from Bloomberg, Bridge, Signal or other reasonably sophisticated market data products. Unfortunately, none of these services is cheap. Signal is probably the most affordable, at about $100 a month.
The value of this data quickly becomes apparent. By 10:30 a.m. EDT, they start painting a picture of the overall trends in the market. When we feel beset by the fog of market hysteria, a quick review of these indicators establishes our proximity to danger. If you would like to know more about the practical use of these indicators, we recommend Trading for a Living: Psychology, Trading Tactics, Money Management by Dr. Alexander Elder (John Wiley & Sons, 1993).
|
