What are Market Indicators?

Market indicators present the analyst’s viewpoint 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 strengthen our analysis or even steer us back to the correct path if our results are way-off that is 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 can gauge the market.

Types of Market Indicators

Following is a broadway of categorizing the Market Indicators:

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#1 – Market Breadth Indicators

These give the viewpoint of how the index or the market has moved during a given period being under analysis. 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. It can be represented in a difference between the two numbers or a ratio.

#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. It indicates how investors feel the market will move shortly or within a specified period.

How to use Market Indicators

Let us take two examples of Market Indicators Usage

One of the most common and popular market breadth indicators is the Advance-Decline (AD) line. For a select market or index, we look at the number of securities that faced an increase in price, i.e., those advanced, and the number of securities that faced a fall in price, i.e., those declined. The difference between the two is the Net advance, and it shows whether investors have been buying in the selected period or selling. If the Net advance is positive, 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., the 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 delistingDelistingDelisting is the process of removing a security from a stock exchange so that it can no longer be traded on that market. It can occur for a variety of reasons, including non-compliance with listing rules or norms, mergers, or bankruptcy.read more 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 of price.

  • It is a Sentiment indicator calculated by the Put volume to Call Volume ratio. Buying more Put options indicates that the investors feel that the prices of the securities are going to fall short, and the call option suggests the opposite.So if the Put call ratioPut Call RatioThe Put-Call Ratio (PCR) is a derivative metric that investors and traders use to measure whether the market is about to turn bearish or bullish. The put and call options enable existing or potential derivative instrument holders to sell and buy underlying assets at pre-defined prices within a specified time frame.read more is greater, 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 investingContrarian InvestingContrarian investing is a strategy where individuals invest against the market trend, i.e., in the opposite direction. The decision is backed by thorough research on investor sentiments.read more. When more and more put optionsPut OptionsPut Option is a financial instrument that gives the buyer the right to sell the option anytime before the date of contract expiration at a pre-specified price called strike price. It protects the underlying asset from any downfall of the underlying asset anticipated.read more are being bought, it may lead to an unrealistic fall in the underlying asset prices 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.

List of Common Market Indicators

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.

The 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

Many other exchanges such as AMEX, TSX, and TSX Ventures also have commonly tracked indicators. These indicators have varying data history and frequencies and may or may not reset daily.

This article has been a guide to Market Indicators and their definition. Here we discuss how to use market indicators and their types (Breadth & Sentiment Indicators) & examples. You can learn more about financing from the following articles –

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