Advanced Stock Market Trading - Level 1_1. Market Indicators

Lesson 1: Market Indicators

#What exactly are Market Indicators

Market indicators are defined as a subset of technical indicators which are used in
predicting the direction of major financial indexes or groups of securities. Market
indicators are very similar to technical indicators in that both apply a statistical
formula to a series of data points to draw a conclusion. However, the difference is
that market indicators use data points from multiple securities rather than just a
single security. Often times, market indicators are plotted on a separate chart rather
than appearing above or below an index price chart. In a nutshell, Market Indicators
measure the health of a group of related stocks, usually by measuring group
participation in a trend. The group can be the members of a broad index, a specific
sector, or even an entire market.

It is important to explain in details the difference between Market Indicators and
Technical Indicators. Just like a technical indicator, a market indicator is a series of
data points derived from a formula. In this case, however, the formula for market
indicators is applied to the price data for multiple securities within the market, instead
of just one security. Price data can come from open, high, low or close points for the
securities, their volume, or both. This data is entered into the indicator formula and
the data point is produced.

However, unlike technical indicators, market indicators are not charted above or
below the chart. Market indicators are what is being charted, and as such have their
own ticker symbols. There are often many symbols that apply the same market
indicator formula to different markets. For example, the $BPSPX and $BPNDX track
the Bullish Percent Index for the S&P 500 and the NASDAQ 100 respectively.

Most market indicators are created by analyzing the number of companies that have
reached new highs relative to the number that created new lows, known as market
breadth, since it shows where the overall trend is headed.

Basically, there are two most common types of market indicators, which are:

Market Breadth indicators: these compare the number of stocks moving in the same
direction as a larger trend. Breadth indicators measure the number or percentage of
stocks in the group that are participating in a trend. Market breadth indicators are
typically based on the price data of the stocks in the group. Popular market breadth
indicators include the Advance-Decline Line, McClellan Oscillator, and Net New
52-Week Highs. The Advance-Decline Line is calculated using the number of stocks
in the group that increased in price (“advancers”) vs. the number that decreased in
price (“decliners”). The Net New 52-Week Highs indicator measures the difference
between the percentage of stocks making new 52-week highs and those making new
52-week lows.

Market Sentiment indicators: these indicators compare price and volume to
determine whether investors are bullish or bearish on the overall market. Not all
market indicators measure market participation using price and volume. Sentiment

Indicators measure investor sentiment: whether investors feel bullish or bearish
about the market. The data used to calculate these indicators vary more widely than
the traditional market breadth indicators: it is often a count of the investors
themselves, or the volume of money they are investing, rather than price and
volume. Popular sentiment indicators include the Put Call Ratio, Volatility Indices,
and the DecisionPoint Rydex Ratio. The DecisionPoint Rydex Ratio is calculated
using the amount of money invested in bullish and bearish mutual funds. The AAII
sentiment indicators are based on poll results of investors. The Put Call Ratio looks
at the number of put options versus call options during a given period. Here is an
example of the Nasdaq Advance-Decline Issues index:

#Popular Market Indicators
There are hundreds of different market indicators covering various indexes in the
United States and around the world, including the NYSE, NASDAQ, AMEX, TSX,
TSX-V, and various options exchanges. Some of the most popular market indicators
include:

#Primary Indicators

Most investors rely on a few favorite stock market indicators, and new ones seem to
pop up all the time, but the two most reliable ones for determining the strength of the
market are price and volume. Most other stock market indicators are derived from
price and volume data. So, it stands to reason that if you follow the price and volume
action on the major market indices each day, you will always be in sync with the
current trend.
Using price and volume to analyze stock market trends, while incorporating historical
stock market data, should be all you need to discern the current market’s strength
and direction. That said, secondary indicators can also help clarify the picture.
#Secondary indicators.

#1. Advance/Decline Line
This plots the number of advancing shares versus the number of declining shares.
The ratio of advancing to declining securities at any given point in time. At times, a
small number of larger weighted stocks may experience significant moves, up or
down, that skew the price action on the index. This line, and its accompanying data,
reveals whether a majority of stocks followed the direction of the major indexes on
that day. Examples: $NYAD and $NAAD.

#2. Short Term Overbought — Oversold Oscillator
This is a 10-day moving average of the number of stocks moving up in price less the
number of stocks moving down in price (for a specific exchange). Stocks with prices

that did not change from the previous close are not included in this calculation. Some
investors may use this indicator to take a contrarian position when the market has
moved too far in one direction over a short period of time.

#3. 10 Day Moving Average Up & Down Volume

Two 10-day moving average lines are presented to illustrate the volume of all stocks
on an exchange (AMEX, NASDAQ, NYSE) that are moving up or down in price.
Many market indicators look at the percentage of stocks above or below key moving
averages, such as the 50- and 200-day moving averages. Blue line: A 10-day
moving average of the total volume of all stocks on an exchange moving up in price.
Pink line: A 10-day moving average of the total volume of all stocks on an exchange
moving down in price. When the two lines cross, this may indicate a trend change in
favor of whichever line is moving up. Examples: $NYA50, $NYA200, $NAA50, and
$NAA200.

#4. 10 Day Moving Average New Highs & New Lows

This is a presentation of two 10-day moving average lines to illustrate stocks
reaching new highs and new lows, corresponding to their specific exchange (AMEX,
NASDAQ, and NYSE). It shows the ratio of new highs to new lows at any given point
in time. When there are many new highs, it's a sign that the market may be getting
frothy, while many new lows suggest that a market may be bottoming out. Blue line:
a 10-day moving average of the number of stocks making new price highs. Pink line:
a 10-day moving average of the number of stocks reaching new price lows (based
on prices at market close). When the two lines cross, this may indicate a trend
change in favor of whichever line is moving up.

Other secondary indicators include:

McClellan Oscillator - This oscillator uses a moving average of highs and lows to
help smooth out market breadth and make it easier to interpret than looking at
choppy charts showing the raw numbers. It ranges from +150 to -150.

#Sentimental indicators:

NYSE Short Interest Ratio

Released by the exchange, this is the ratio of all short interest on the NYSE
exchange divided by the average daily volume. As this ratio increases, it’s a sign that
market sentiment is becoming increasingly negative, because more investors are
taking short positions. However, when this ratio nears extreme levels it can be used
as a contrarian indicator.

Bulls vs. Bears Ratio

Published by Investors Intelligence, this sentiment indicator is the result of a poll of
market professionals. Simply put, it’s the ratio of those professionals who have a
bullish outlook on the market versus a bearish one. Just like most other sentiment

indicators, this ratio can be used as a contrarian indicator when it nears extreme
levels.

Economic Calendar

An economic calendar is a list of current and upcoming announcements for a variety
of Economic Indicators. It includes the period the announcement covers as well as
the consensus estimate for each indicator, if available. The market tends to react
favorably when positive numbers are reported. Keep in mind that the market may
have already priced in the result of the announcement based on the consensus
estimate prior to the announcement. Thus, when the reported numbers fall short of
the consensus estimate, the market may react unfavorably.

Other Psychological (Sentiment) Indicators

There are many other sentiment indicators that attempt to capture how market
participants feel about the current environment. They all tend to work with varying
degrees of success in particular situations, but the best indicators for portraying
actual market strength are the ones directly derived from actual market price and
volume data. Here are a few other sentiment indicators to consider for market
directional analysis:

✓ The CBOE Market Volatility Index
✓ Price Premium in Puts versus Calls Ratio
✓ The number of stock splits in the prior 30 days
✓ New Issues in the last year as a % of All stock on an index
✓ Price-to-Book Value of an index
✓ Price-to-Earnings Ratio of an index
✓ Current % Dividend Yield of an index

#Stock Market Indexes

The U.K.’s FTSE 100, Germany’s DAX 30 and France’s CAC 40 are three popular
European stock market indexes. In many ways, they're comparable to the Dow
Jones or S&P 500 in the United States in the sense that they are a proxy for the
broader market.

Britain’s FTSE 100 Index

The FTSE 100 is an index created by the FTSE Group that represents the 100 most
highly capitalized companies in the U.K. listed on the London Stock Exchange (LSE).
Investors looking to invest in the FTSE 100 can either purchase foreign ETFs, such
as the iShares FTSE 100 (LSE: ISF) or purchase individual components in the FTSE
100 using American Depository Receipts (ADRs). Popular companies in the FTSE
100 include: BP plc (NYSE: BP), BHP Billiton plc (NYSE: BBL), GlaxoSmithKline plc
(NYSE: GSK).

Germany’s DAX 30 Index

The DAX 30 is a popular index consisting of Germany’s 30 largest companies
trading on the Frankfurt Stock Exchange (FSE). Investors looking for exposure to the
DAX 30 index can consider purchasing foreign ETFs, like the iShares DAX 30 ETF

(BIT: EXS1) or purchasing individual components in the DAX 30 using ADRs.
Popular companies in the DAX 30 include: Siemens AG (NYSE: SI), BASF SE
(PINK: BASFY), Bayer AG (PINK: BAYRY)

France’s CAC 40 Index

The CAC40 is France’s largest index and consists of its 40 largest companies, of
which the majority are domiciled in France. Investors looking to buy a piece of the
CAC 40 can either purchase foreign ETFs, such as the Lyxor CAC 40 ETF (EPA:
CAC), or purchase individual components of the CAC 40 in the form of ADRs.
Popular companies in the CAC 40 include: Sanofi (NYSE: SNY), ArcelorMittal
(NYSE: MT), Total SA (NYSE: TOT)

The EURO STOXX 50 Index

The EURO STOXX 50 is a leading index of Europe’s 50 largest blue-chip companies
that span 12 eurozone economies. The Deutsche Borse, Dow Jones and SWX
Group maintain the index and select its components based on a number of different
criteria. Investors can gain exposure through the index through ETFs or ADRs.
Some popular U.S.-based ETFs tracking the EURO STOXX 50 include: SPDR
EURO STOXX 50 ETF (NYSE: FEZ), iShares EURO STOXX 50 ETF (NYSE: EUE).