When it comes to trading, indices can be considered the barometer as to the mirror market behavior. As there are many stocks and instruments trading in the open market, it is not possible to look at them individually to find out the direction of the general market. The indices provide traders with a broad outline of the market movement and represent the market.
For a trader, indices can help traders recognize broad trends in the market and can thus be used as a benchmark to evaluate an investor’s portfolio. They also function as a status report for the general economy. Technical analysts can predict the future movement of the stock market by studying the historical performance of the indices. The relationship between the index and the individual stock predicts the individual share price movement.
10 Important Indices to Consider While Trading
The Wilshire 5000 index is very helpful to both investors and traders and is sometimes called the total market index or total stock market index. It includes all of the publicly traded companies which are headquartered in the U.S. It’s a representation of the entire U.S stock market and its aggregate movement.
Short Interest Ratio
The Short Interest Ratio measures the market volume against the shorts on a monthly basis. To obtain the ratio, the short Interest is divided by the current average daily volume. The market is considered bullish when the ratio is 2% or higher. This means that there are too many shorts for the amount of volume going on in the market. Alternatively, a ratio of 1% or less indicates that the market is bearish.
Brokers’ Free Credit Balance Index
The amount of credit held in a customer’s bank account is considered as latent buying power. If we measure this amount monthly, it tells us what stage of the bull or bear market we are in. Customers have the tendency to use up more of this credit cash as a bull market reaches its top. However, they tend to let most of this money stand idle in the first half of the bull run as they aren’t convinced yet. You can find these figures in Barron’s, which is one of the leading online portals providing financial news, in-depth analysis, and commentary on stocks, investments, and how markets are moving. These sorts of news sources are a must to keep up with your indicators.
Debit Balances Index
The Debit Balances Index is considered a mirror image of the Brokers’ Free Credit Balance Index. This Index tends to rise during the 1st two stages of a bull market. It generally tops out in the last portion of the bull market and drops steadily in the following bear market. It’s a representation of the money owed to brokers in margin accounts and thus represents experienced and efficient traders.
Dow Jones Industrial Average 10- day Moving Average
The Dow Jones Industrial Average or DJIA as its known is a stock market index that measures the performance of 30 large companies listed in United States stock exchanges. There are several indices based on the DJIA, one of which is the DJIA 10-day Moving Average of internal volume. To use this index, you have to total the volume of all the Dow stocks that rose and those that fell in a separate fashion. Make a 10-day moving average of the plus and minus volume. You then have to subtract these totals daily and chart the value as a plus or minus figure. This chart will provide you information on blue-chip strength if you use trend lines on it. Breaking a trend line is usually considered a valid signal.
The Nasdaq index reflects the more speculative aspects of Wall Street. No bull market can exist until the speculative element is active. You have to remember that Blue Chip stocks alone do not make up a bull market. You should thus make an advance-decline line for the Nasdaq in the same fashion you would do for the DJIA index. You can also plot volume and make a high-lows index. Always watch out for any disparity between Nasdaq and the S&P or DJIA.
The Dow is unable to make and sustain a bull market on its own and the Nasdaq is likely to top out and go into a sustained decline before the Dow Industrials, as evidenced in 2000. Remember that any rally in the Dow will not herald a major new bull market unless the NASDAQ also reflects the move.
The DJIA resistance ratio is similar to the DJIA 10 Day MA but is limited to only those DJIA stocks that remain unchanged. This volume is posted on a daily basis instead of a 10- day moving average. On particular days when the volume is high, you can safely assume that whatever the market did that day is wrong and will be reversed the following day.
DJIA Volume ratio
The DJIA volume ratio considers the volume of all DJIA stocks. Simply divide the figure by the volume of the market as a whole. The percentage ratio you get is a representation of the share of blue chips in the entire market. Usually, a high volume ratio is bullish and a low ratio is bearish. It can range anywhere from 8% to 14%.
The Leadership index shows the average price of the daily volume leaders. If it falls on upswings or rises on downswings, the market is considered bearish. It’s a very rarely followed index.
Percent of Advances Index
To get this index, divide the daily advances by the issues traded. When this index falls below, 40%, it signals that there may be some weakness ahead.
The above indices are part of a vast collection of indices that can be used to trade and invest in the stock market correctly. You should follow indices based on your comfort level and full understanding of the implications of each move.