Amazon Update: Market Indicators, Technical Indicator Review, Interest Rates, Consumer Confidence, Market Psychology, Economic Growth, Kondratieff Cycle
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Cycles
Market cycles (re Cycle Theory) reflect price swings -- up, down, and up again in continuing fashion. Many cycles have been touted as having special significance as market timing tools. Two of the popular cycles are the four-year and the fifty-year cycles.
The Kondratieff Cycle is a 50-year economic cycle postulated by the Russian, Kondratieff. It has an initial phase lasting about 20 years, a second phase about 10 years and a final phase that also runs about 20 years. For more details, see The History of Adulteration, by Peter Haydon, or Technical Analysis Explained, by Pring. See also Technical Analysis.
There are also 18-year and 9.2-year cycles. Among wave theories, proper, the Elliott Wave Theory is probably the best well known, and there are many variations of it. The Neely Neo-wave theory is one of them.
Cycles help to establish the position of the market. The general idea is to buy when cycle bottoms have been reached -- particularly when a number of cycle bottoms come together. The problem in interpretation is to recognize when you have a bona fide wave pattern and when you're at a buy (or sell) point in the price history. As with most things, it's a pattern recognition problem. You have to get past just looking and begin to see what's happening.
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Here are the main indexes of market price behavior: You can use them to see how different segments of the overall market are trending. You need a source of market charts. The symbol after each index is the ticker symbol -- they aren't universal.
Dow Jones 30 Industrials -- DJIND, .INDU
Standard & Poor 500 -- SPX
Nasdaq Composite -- COMP.IDX, COMP
Nasqaq 100 -- QQQ
Nasdaq 100 (Euro Style) -- NDX
Dow Jones Utilities -- UTY
Dow Jones Transportation -- TRX
Russell 2000 "MITTS" -- RSM
Russell 2000 -- RUT
The Street.com, Inc. -- TSCM
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AMEX Airlines -- XAL
AMEX Biotechnology -- BTK
AMEX Broker-Dealers -- XBD
AMEX Gold Bugs -- HUI
AMEX Comp. Hardware -- HWI
CBOE Gold -- GOX
CBOE Internets -- INX
CBOE Volatility Index --VIX
Crude Oil -- OIX
Fanny Mae -- FMY
Freddie Mac -- FRE
Goldman Sachs Software Stocks -- GSO
Internet Stocks -- IIX
Morgan Stanley Consumers -- CMR
Morgan Stanley Cyclicals -- CYC
Morgan Stanley High Tech -- MSH
Natural Gas -- XNG
Networking Stocks -- NWX
Oil Services -- OSX
PHIL Wireless Telecom -- ILS
PHLX Banks -- BKX
PHLX Gold & Silver -- XAU
Semiconductors -- SOX
S&P Retailers -- RLX
The Street.com e-Commerce -- ICX
The Street.com Internets -- DOT
Tobacco -- TOB
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Market Breadth Indicators
Breadth indicators (like the Advance/Decline line) are measures of the number of stocks going up or down in price or establishing highs or lows. The market has good breadth when most stocks are participating in a market advance. Otherwise, it has bad breadth!
In my view, breadth should be in terms of price swings within a market trend, which may be up, down, or flat. Since there are trends within trends within trends, there will be many levels of breadth, and you should take care to keep the readings separate. So, if a trend is up, and the breadth increases on the price upswing, the index is bullish. If the trend is down, and the breadth increases on the downswing, the sign is bearish. Similarly, if the trend is up, and the breadth decreases on the upswing, the reading is bearish. And if the trend is down, but the index increases on the upswing, the read is bullish.
Breadth Advance/Decline Indicator
This indicator is calculated by taking the 10-day simple (non-weighted) moving average of the number of advancing issues divided by the number of advancing plus declining issues. (The unchanged issues are ignored.) It is bullish at high readings, i.e., at readings of almost one, which occurs when there are many more advancing issues than declining issues.
In bull markets a larger proportion of stocks participate in the up surge at the beginning of a trend than participate at the end of the trend. At first, money pours into the market almost indiscriminately. But as the bull market wears on, the weaker stocks fall by the wayside, while the stronger keep going. So the stronger stocks last longer, and when they finally give out, the bull market ends. Breadth therefore tends to decrease as the bull trend gets long in the tooth. The indicator is designed to detect the decline and warn of an end to the move.
The McClellan Oscillator
This is a short-term to intermediate-term breadth indicator. It is a price rate of change index and is calculated by subtracting {a 39-day exponential moving average of the net difference between the number of advancing issues and the number of declining issues} from {a 19-day exponential moving average of the net difference between the number of advancing issues and the number of declining issues}.
This indicator compares a shorter-term moving average of the difference with a longer-term moving average of the difference and signals when the market is overbought or oversold. That is, it compares the rates of change of prices over the longer and shorter periods.
It normally goes through zero near market tops and bottoms, where the price trend is changing direction. Compare this with a ball under the influence of gravity. When an upward moving ball reaches its maximum height, the upward velocity goes to zero and is negative going down. In the market, similarly, the price reaches a maximum and the rate of change of price goes to zero and becomes negative on the down move.
The McClellan Summation Index
This index is a cumulative or running total of the McClellan Oscillator readings and gives buy/sell signals when it crosses zero.
Most Active Stocks
This index refers to the quality of a market move. When the average price of stocks on the most active list is very high, market activity is presumed to be in higher quality issues, indicating a sound market. But, when.the stock exchange activity is primarily directed to the low priced (or so-called speculative) stocks, the major market trend is reaching a final blow-off stage, leading to the bear stage.
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Earnings Estimates and Earnings Estimators
Instead of betting on the estimates of earnings of the corporate world, bet against the estimators of the earnings, because they are usually wrong -- according to Dreman.
Earnings Upgrade/Downgrade
Going along with the notion that the market tends to follow the money, a measure of the improvement or decline in the earnings of the corporate world should be an indication of the market direction. When the earnings growth hits a stone wall, it may well be time for a period of consolidation in market prices.
Granville's Short- and Intermediate-term Indicators
For these indicators, see Granville's Day-to-Day and Intermediate-term indicators.
Intermarket Indicators
These indicators are summarized in Intermarket Analysis.
January Barometer
As January goes
for the market, so goes the year. The rationale is just that January begins the calendar year and is a time when investors reassess the market climate. They make portfolio adjustments to match their expectations of stock prices for the year.
New High/New Low Ratio
A ratio of the number of new highs to the number of new lows, this indicator shows a bullish tendency when it gives high readings, but is only mildly bearish at extremely low readings.
Price/Earnings Ratio
Calculated by dividing current price by the latest 12 months' earnings per share, the price/earnings ratio is bullish if the value is low, so long as the company is sound. Correspondingly, it is bearish if high, assuming earnings are trending lower.
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Advance/Decline Ratio
A momentum indicator or an overbought/oversold indicator, this ratio is simply the number of advancing issues divided by the number of declining issues and tends to give the direction of the market. Higher values therefore indicate an up market, and lower values indicate a down market. It is best used as a smoothed ratio, for which a 10-day moving average is common.
The Arms Ease of Movement Value
This is a momentum indicator and is calculated from the following formula for ease of movement:
EMV = [(H + L)/2 - (Hp + Lp)/2]/(V/(H - L)),
where: H = the current period's high price
L = the current period's low price
Hp = the previous period's high price
Lp = the previous period's low price
V = volume
You take the difference between the current average of high and low and the just prior average of high and low, and divide the difference by volume per point of difference between current high and low. The smaller the difference between current high and low, the greater the denominator and therefore the lesser the ease of movement, EMV.
Daily Price Persistency
According to Fosback, and unlike Malkiel, the facts prove there is price persistency (or momentum) in the market. The market tends to move in one or the other direction -- i.e., following one or another trend. But the longer the market moves in a certain direction, the greater the likelihood that the market will move in the other direction the next day.
The "Going Nowhere" Indicators
A market that does nothing
is the basis for the Unchanged Issue Index -- the ratio of unchanged issues to total issues. A low percentage suggests the market is at a bottom, when fluctuations are greatest (and few issues remain unchanged), while a high percentage suggests a broad top, where prices are little changed.
Momentum Oscillators
Market momentum oscillators are an intriguing class of indicators that attempt to establish and measure the "inertial" quality of stock prices, i.e., the tendency to stay moving. The indicator is defined in a number of different ways. For details, see Momentum Oscillators.
The argument for this indicator is that momentum precedes price. The idea is that a change in momentum can predict a change in price. You would compare the momentum of a stock at one moment with that of a prior moment. To work with more stable values of momentum, you can use moving averages of the momentums.
Rate of Change
See my discussion on momentum indicators.
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Bill, Fund, and Discount Rates
Treasury bill rates, federal funds rates, and discount rates reflect the way the banks of the Federal Reserve System adjust their cash reserves. When the funds rate is higher than the discount rate, money is tight, and this is bearish for stocks.
Discount Rate
This is the interest rate the Federal Reserve banks charge their member banks for direct loans. Discount rates tend to follow interest rates, but even so, stock prices tend to rise after a discount rate cut, a phenomenon that reflects concomitant changing market interest rates.
Free Reserves
Free reserves measure the liquidity of the banking system. When banks have plenty of cash, they can lend money to companies. This is good for business and leads to higher market prices. When banks are fully loaned out they have poor liquidity, and this leads to declining economic conditions and lower market prices.
Inflation
In the long run, common stocks have proven to be an inflation hedge. But in the short run, rampant inflation usually results in lower stock prices. This odd situation appears to be due to the unstable nature of inflation. A steady inflation is tolerable, because investors can adjust. But the unstable aspect creates uncertainty, and this scares investors. A long stretch of dis-inflation seems best for markets.
Interest Rates
A decline in interest rates naturally decreases the cost of borrowing money, which in turn reduces the cost of doing business. This is good for business and a mark of increasing profits and higher stock prices.
Margin Requirements
When the Federal Reserve System lowers the minimum down payment required for the purchase or short sale of stocks, this is a slightly leading indicator of market bottoms.
Money Flow
Developed by Marc Chaikin, the Chaikin Money Flow oscillator is based on the level of the close relative to the high/low range. Accumulation or buying pressure is present when prices close in the upper half of the day's range on increased volume. Distribution or selling pressure is evident when prices close in the lower half of the day's range with increased volume. Because the change from close to close is not considered in the calculation, a security can close lower (higher) and still exhibit signs of accumulation (distribution).
Money Supply
Money supply
is more of a coincident indicator of current market conditions than a leading indicator. When it rises, the market rises as well, and conversely, when it falls, the market falls. The rate of increase or decrease doesn't seem to matter.
Reserve Requirements
When the Open Market Committee of the Fed changes the minimum cash reserve level that system banks must carry by law, this forces a significant change in the trend of interest rates or monetary aggregates. An increase in the requirements normally leads to a market decline, and a decrease almost immediately results in a market advance.
Three Steps and a Stumble
When the Fed tightens either one of the discount rate, margin requirement, or reserve requirement three times in a row, the market should decline.
Two Tumbles and a Jump
When the Federal Reserve decreases one or the other of the discount rate, margin requirements, or reserve requirement two times in a row, this is bullish for the market.
Yields Among Different Length Maturities
This index compares the interest rates of shorter and longer maturities -- bills, notes and bonds. Normally, in a bull market, longer maturities, like bonds, have higher interest rates than shorter maturities, like bills. So, when treasury bills yield more than notes or bonds, producing what is called an inverted yield curve, something is wrong -- the situation has bearish implications.
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Overbought/Oversold Indicators
Also a momentum indicator, an overbought/oversold indicator is simply the number of advancing issues divided by the number of declining issues and tends to give the direction of the market. Think of this index in terms of the market price swings. The market becomes overbought at the top of its swing cycle and oversold at the bottom of its swing cycle. It is best used as a smoothed ratio, for which a 10-day moving average is common.
The McClellan Oscillator
See Market Breadth Indicators, above.
The McClellan Summation Index
This index is a cumulative total of the McClellan Oscillator.
Overbought/Oversold Index
Also called the Advance/Decline Ratio, this index is the ratio of the number of stocks on a given day that advanced to the number that declined. When the index is above 1.25, the market is considered overbought, and when it is less than .75, it is considered oversold. The general idea is that markets can't sustain a continued rise in more and more stocks and therefore tends to reach a limit. The extremes are reached on the downside as well as the upside, and occur in bear markets as well as bull markets. They can be seen at any trend level..
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