Market Indicators

Market indicators are broad measures of market indexes or groups of related securities.
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Market indicators provide context to recent market trends, measure the strength or weakness of an index’s price, assess investors’ participation in a recent price trend, or signal extreme market sentiment levels. Internal strength, market breadth, and volatility are measured by market indicators to determine if the market trend is improving or deteriorating.

Market breadth measures the broadness of participation in a market trend by considering data points such as the number of issues advancing relative to the number of issues declining.

Strong market breadth measures indicate the majority of issues in an index are exhibiting the same price behavior. Indicators of market breadth assess the internal strength of the market.

Advance-Decline

The advance-decline line is also referred to as the breadth line and is a cumulative measure of advancing versus declining stocks each day. The number of advancing stocks minus the number of declining stocks is added to the previous day’s value to create a cumulative value. If more stocks rise than fall, the advance-decline line increases.

A rising advance-decline line shows internal strength. The advance-decline line is often compared to a market index such as the S&P 500 for confirmation or divergence relative to the index’s price action. Advance-decline is calculated as a cumulative value line and a ratio (advance-decline ratio or advance-decline percentage).

Arms (TRIN) Index

The Arms index is a volume indicator of market breadth that measures the relative volume of advancing stocks compared to declining stocks. The Arms index, also known as the TRIN or Short-Term Trading Index, is calculated by dividing two ratios.

The numerator is advancing issues divided by declining issues. The denominator is the total volume of advancing issues divided by the total volume of declining issues.

The Arms index typically moves somewhat inversely to the market. Selling on heavy volume will send the Arms index higher while heavy-volume buying sends the Arms index lower.

Arms index readings above and below 1 indicate extremes. Arms index levels above 1 are typically bearish, while levels below 1 are typically bullish.

A reading greater than 1.2 may indicate a potential short-term bottom or oversold condition. A reading of less than 0.8 may indicate a potential short-term top or overbought condition.

McClellan Oscillator

The McClellan oscillator is a breadth indicator of the NYSE index calculated by taking the difference between two exponential moving averages of advances minus declines.

The McClellan oscillator is similar to the MACD indicator because it uses a fast-moving average (19-day) and slower-moving average (39-day) to provide signals of overbought and oversold conditions. Like the MACD, the McClellan oscillator can be displayed as a line chart or a histogram.

Oscillators move back and forth (oscillate) within a range, so extreme values are especially noteworthy. Readings above +100 or below -100 are typically referred to as extremes.

Bullish and bearish divergences between the McClellan oscillator and the major indexes are considered significant.

Net New 52-Week Highs

Net new 52-week highs is a high-low market indicator of breadth where the number of new 52-week lows is subtracted from the number of new 52-week highs. If there are more new highs than new lows on the NYSE, the cumulative net new highs line advances.

The net new 52-week highs indicator is similar to the advance-decline indicator. The net new 52-week highs is displayed as a line chart or histogram. A moving average of the net new 52-week highs line is often tracked as a trend indicator.

Put/Call Ratio

The put/call ratio is a volume-based market indicator of sentiment where the total volume of put option contracts traded on the CBOE is divided by the total volume of call option contracts traded.

Because call options typically represent a bullish bias and put options signal a bearish bias, more put options trading than call options is an indicator of bearish market sentiment. The put/call ratio is also used to indicate extreme measures of sentiment. For this reason, the put/call ratio is a somewhat contrarian indicator.

For example, a put/call ratio above 1.2 is a relatively extreme level of bearish exposure in the market and may be seen as a contrarian indicator that conditions are favorable for a near-term reversal higher in equity prices. A put/call ratio below 0.8 means more call options are being purchased relative to put options and may indicate that conditions are favorable for a near-term sell-off.

Index-only, equity-only, and total option volume versions of the put/call ratio are available.

The VIX Index

The CBOE VIX index is a benchmark index where expected future volatility is calculated based on put and call option pricing in the S&P 500 index (SPX options). The VIX index is a 30-day representation of volatility expectations for the S&P 500.

Because volatility refers to the magnitude of price movements up or down, increases in the VIX indicate potentially high levels of price movement in the future.

The VIX is often referred to as a fear index because investors may buy VIX futures as a hedge against long stock positions, causing the VIX to increase in times of uncertainty. Therefore, the VIX is often used to measure investor anxiousness about the future.

High VIX index levels typically correspond with declining equity prices. Spikes are particularly noted and used as an indication of a need to hedge. From a contrarian perspective, extreme readings on the VIX may indicate near-term or long-term bottoms in equity prices.

COT Reports

COT reports are the Commitment of Traders reports published each week that break down positions in various futures and futures options markets. The commitment of traders weekly report shows open interest for markets where 20 or more traders hold positions equal to or above the required reporting levels of the Commodities Futures Trading Commission (CFTC).

Traders self-report as hedgers or speculators, and the report provides insight for market participants as to the relative positioning of significant market players. The report shows net long or short positions in the reported futures markets. The COT report is a market indicator of large, institutional positions.

Total open interest, minus the positions of those required to report holdings, is known as the public position. If the primary users of a particular commodity are long, the public may follow the same course of action.

The positioning difference between hedgers and speculators is also a key takeaway from the report. Changes in position size from week-to-week and the difference in positioning between the market participants are used as a market indicator.

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FAQs

How do you read advance-decline?

The advance-decline line is a cumulative measure of advancing stocks versus declining stocks each day. The number of advancing stocks minus the number of declining stocks are added to the previous day’s value to create a cumulative value.

If more stocks rise than fall, the advance-decline line increases. A rising advance-decline line shows internal strength. Advance-decline is calculated as a cumulative value line as well as a ratio.

How to calculate the advance-decline ratio?

The advance-decline ratio is calculated by subtracting the number of declining stocks from the number of advancing stocks in a day and adding the total to the previous day’s value to create a cumulative value.

How do you use the TRIN index?

The TRIN index, or Arms index, is a volume indicator of market breadth that measures the relative volume of advancing stocks compared to declining stocks.

The TRIN index, also known as the Short-Term Trading Index, is calculated by dividing two ratios. The numerator is advancing issues divided by declining issues. The denominator is the total volume of advancing issues divided by the total volume of declining issues.

The Arms index typically moves somewhat inversely to the market. Arms index readings above and below 1 indicate extremes. Arms index levels above 1 are typically bearish, while levels below 1 are generally bullish. A reading greater than 1.2 may indicate a potential short-term bottom or oversold condition. A reading of less than 0.8 may indicate a potential short-term top or overbought condition.

What is the current Arms index rate?

The Arms index, or TRIN index, is updated throughout every trading day and is constantly changing. Arms index readings above and below 1 indicate extremes. Arms index levels above 1 are typically bearish, while levels below 1 are typically bullish.

How is the McClellan oscillator calculated?

The McClellan oscillator is calculated by taking the difference between two exponential moving averages of advances minus declines. The McClellan oscillator uses a fast-moving average (19-day) and slower-moving average (39-day) to provide signals of overbought and oversold conditions.

The McClellan oscillator can be displayed as a line chart or a histogram. Oscillators move back and forth (oscillate) within a range, so extreme values are especially noteworthy.

Readings above +100 or below -100 are typically referred to as extremes. Bullish and bearish divergences between the McClellan oscillator and the major indexes are considered significant.

Should you buy stocks at 52-week high?

Buying and selling stocks is subjective. Investors may use a number of analytical inputs to aid in the decision-making process.

A 52-week high indicates an upward trend in a trend following approach and may generate a buy signal. Meanwhile, others may view the 52-week high as an overbought opportunity and choose to sell at what they perceive to be resistance in a mean-reversion strategy. 

What is a good put/call ratio?

The put/call ratio is a volume-based market indicator of sentiment. The total volume of put option contracts traded on the CBOE is divided by the total volume of call option contracts traded.

Because call options typically represent a bullish bias and put options indicate a bearish bias, more put options trading compared to call options is an indicator of bearish market sentiment.

Neither is good or bad but may signal different investment ideas for different traders.

The put/call ratio is also used to indicate extreme measures of sentiment. For this reason, the put/call ratio is a somewhat contrarian indicator.

For example, a put/call ratio above 1.2 is a relatively extreme level of bearish exposure in the market and may be seen as a contrarian indicator that conditions are favorable for a near-term reversal higher in equity prices. A put/call ratio below 0.8 means more call options are being purchased relative to put options and may be seen as an indication that conditions are favorable for a near-term sell-off.  

How does the VIX Index work?

The CBOE VIX index is a benchmark index where expected future volatility is calculated based on put and call option pricing in the S&P 500 index (SPX options). The VIX index is a 30-day representation of volatility expectations for the S&P 500. Because volatility refers to the magnitude of price movements up or down, increases in the VIX indicate potentially high levels of price movement in the future.

The VIX is often referred to as a fear index because investors may buy VIX futures as a hedge against long stock positions, causing the VIX to increase in times of uncertainty. Therefore, the VIX is often used to measure investor anxiousness about the future. High VIX index levels typically correspond with declining equity prices.

Spikes are particularly noted and used as an indication of a need to hedge. From a contrarian perspective, extreme readings on the VIX may indicate near-term or long-term bottoms in equity prices.

How do you read the Commitment of Traders report?

Commitment of Traders reports are published each week and break down positions in various futures and futures options markets. The commitment of traders weekly report shows open interest for markets where 20 or more traders hold positions equal to or above the required reporting levels of the Commodities Futures Trading Commission (CFTC). Traders self-report as hedgers or speculators, and the report provides insight for market participants as to the relative positioning of important market players.

The report shows net long or short positions in the reported futures markets. The COT report is a market indicator of large, institutional positions. Total open interest, minus the positions of those required to report holdings, is known as the public position.

The positioning difference between hedgers and speculators is also a key takeaway from the report. Changes in position size from week-to-week and the difference in positioning between the market participants are used as a market indicator.

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