Market Indicators (Definition) | Top 2 Types

What is Market Indicators?

Market Indicators are mathematical ratios and analyses that help the investor to develop a viewpoint of the securities trading in the market, such as single security or at an index, i.e. for a group of securities.

Types of Market Indicators

Following is a broadway of categorizing the Market Indicators:

#1 – Market Breadth Indicators

These indicate how many securities within an index have seen an increase in price while how many have seen a decrease or it can also be the case of how many have been bought and how many have been sold and so on. This can be represented in the form of a difference between the two numbers or a ratio. These give the viewpoint of how the index or the market has moved during a given period of time being under analysis.

#2 – Market Sentiment Indicators

These indicate how many investors are participating in a certain scenario in the market, such as buying the securities in an index or selling them. It can also be the case that what is the amount of investment, investors are making in a certain index or market. This indicates how investors feel the market will move in the near future or in a certain specified time period.

Examples of Market Indicators

There are several commonly known indicators prevalent in the investing community a few such indicators are listed below:

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A – Advance-Decline Line

One of the most common and popular market breadth indicators is the AD line. For a select market or index, we look at the number of securities which faced an increase in price i.e. those advanced and the number of securities which faced a fall in price i.e. those declined. The difference between two is the Net advance and it shows whether investors have been buying in the selected period of time or selling. If the Net advance is positive then the investors have been buying and vice versa. Investors buy when they feel that the stocks will go up in the future i.e. they are bullish and vice versa.
Plotting the Net advances gives us the AD Line. AD Line is a cumulative number, i.e. current period Net advance value is added to the previous period’s value to come up with the end of the period value.
There is one drawback to this indicator. For indices that face regular listing and delisting of securities, such as NASDAQ, the AD Line may not always be in sync with the index because the index removes the impact of the delisted stock while the AD line doesn’t.
AD Volume Line is similar to the AD line but it analyses the Net advance in volume instead in price.

B – Put Call Ratio

This is a Sentiment indicator, calculated by the ratio of Put volume to Call Volume. Buying more of Put options indicates that the investors feel that the prices of the securities are going to fall in the near future and the call option suggests the opposite.
So if the Put call ratio is greater than, we can say that there is a bearish sentiment and when it is less than 1, there is a bullish sentiment within the investor community.
At times this indicator is even used in contrarian investing because when more and more put options are being bought, it may lead to unrealistic fall in the prices of the underlying asset that overstates the risk associated with it. The opposite can be said about call options. Therefore the interpretation of sentiment indicators varies from one analyst to another.

There is a long laundry list of indicators and new ones are fashioned by analysts every day. Therefore analyzing all of them is not always possible.

Following are a few indicators of NYSE normally tracked by the investors:

$NYUPV: It moves when the volume advances
$NYUD: Advance-Decline Volume
$NYADV: Issue advancing
$NYAD: Advance-Decline Issues
$NYMO: McClellan Oscillator (Ratio-Adjusted).
$NYLOW: New 52-Week Lows
$NYHGH: New 52-Week Lows

Following are a few indicators of NASDAQ normally tracked by the investors

$NAAD: Same as $NYAD, only different.
$NAMO: McClellan Oscillator (Ratio-Adjusted).
$NAA150: Stocks Above 150-Day Moving Average
$NAHLR: New High/Low Ratio

There are many other exchanges such as AMEX, TSX and TSX Ventures, which also have commonly tracked indicators. All these indicators have varying data history and frequencies and may or may not reset daily.

By analyzing these indicators, investors predict on how will the market react in the near future and thereby use such insights in making investing decisions.

Conclusion

We need to understand that Market indicators present the view-point of the analyst on the market and they are tools to justify their expectations of the market. These may not always predict the market correctly and therefore cannot be completely relied upon while making investing decisions.

Published indicators can be used to strengthen our analysis or even steer us back to the correct path if our results are way-off that suggested by these indicators, however, at times, these indicators might be wrong as well and a contrary analysis is more justified. So ultimately it boils down to how well the analyst is able to gauge the market.