Market Strength: Conclusion
AAA
  1. Market Strength: Introduction
  2. Market Strength: S&P 500 Futures
  3. Market Strength: Advancers to Decliners
  4. Market Strength: Relative Strength Index and Arms
  5. Market Strength: Oil and Bonds
  6. Market Strength: Conclusion

Market Strength: Conclusion


The usefulness of these indicators depends on what type of investor you are. Long-term investors shouldn't care too much if the S&P futures are up or down before the markets open, whereas traders and short-term investors find this type of information key.

Regardless of what type of investor you are, knowing the overall trend of the market over several months is beneficial. It doesn't mean you should trade on the basis of this trend, but if you are informed you may be able to protect your assets.

Here's a quick recap of what we've learned:

  • The S&P 500 index contains many of the largest companies in the world, making it a good indicator of overall, short-term market direction
  • If S&P futures are up, this indicates an upward trend in the stock market. If S&P futures are down, it's a sign that the market will trend lower.
  • This rise or decline in a futures contract is usually calculated as a change from fair value, or the equilibrium price for a futures contract.
  • An arbitrageur is someone who simultaneously purchases and sells a security (or index) in order to profit from a differential in the price - they are part of the reason that the market follows the trend in futures contracts.
  • Index arbitrage is an investment strategy that attempts to profit from the differences between actual and theoretical futures prices of the same stock index. This is done by simultaneously buying (or selling) a stock index future while selling (or buying) the stocks in that index.
  • The A/D line is a technical analysis tool. It is the ratio between advancing stocks and declining ones.
  • The A/D line is not a short-term indicator; it shows us the cumulative trend of advancers to decliners over a particular period of time.
  • Relative Strength Index (RSI) is a technical analysis indicator that compares the days that a stock finishes up against when it finishes lower.
  • The RSI ranges from 0 to 100, but a stock is considered overbought if it reaches the 70 level, meaning that you should consider selling. When it is a true bull market, an RSI of 80 might be a better level since stocks often trade at higher valuations. Likewise, if the RSI approaches 30, it is a strong buying indicator (20 in a strong bear market).
  • The Arms index is a market performance indicator that weighs each stock by the volume traded for each issue. A ratio of one means the market is in balance. A ratio above one indicates that more volume is moving into declining stocks. A ratio below one indicates that more volume is moving into advancing stocks.
  • Oil is an energy commodity; its price can affect many companies.
  • The day to day price fluctuations in oil won't cause inflation fears, but if its price increases steadily it could cause investors to be fearful that inflating energy prices will slow company profits.
  • The price of oil has an opposite effect on those stocks directly influenced by the price of oil such as drilling, pipeline and retail distribution of energy stocks.
  • Bond prices can also be used to gauge the strength of the stock market.
  • An increase in bond prices means a decrease in yields, which may cause more investors to move their money to the stock market for higher returns.
  • Lower bond yields also tends to lead to lower interest rates, making it cheaper for companies to borrow money to finance growth.

  1. Market Strength: Introduction
  2. Market Strength: S&P 500 Futures
  3. Market Strength: Advancers to Decliners
  4. Market Strength: Relative Strength Index and Arms
  5. Market Strength: Oil and Bonds
  6. Market Strength: Conclusion
RELATED TERMS
  1. Endowment Effect

    The endowment effect describes a circumstance in which an individual ...
  2. Self-enhancement

    The self-enhancing bias is the tendency for individuals take ...
  3. Gamification

    Gamification describes the incentivization of people's engagement ...
  4. Anchoring and Adjustment

    Anchoring and adjustment is a cognitive error described by behavioral ...
  5. Sample Size Neglect

    Sample size neglect occurs when an individual infers too much ...
  6. Credibility Theory

    Tools, policies, and procedures used by actuaries when examining ...
  1. Are small cap companies more risky investments than large cap companies?

    Learn about the risk of small cap companies compared to large cap companies. Compare the volatility of both and learn how ...
  2. What main factors affect share prices in the metals and mining sector?

    Discover the primary factors that influence share prices of companies in the metals and mining sector and how companies can ...
  3. What does the efficient market hypothesis assume about fair value?

    Found out what the efficient market hypothesis says about the fair value of securities, and learn why technical and fundamental ...
  4. What role do core competencies play in a balanced scorecard?

    See how some businesses can combine the concepts of core competency and a balanced scorecard in an attempt to build sustainable ...

You May Also Like

Related Tutorials
  1. Fundamental Analysis

    Ethical Investing Tutorial

  2. Investing Basics

    Industry Handbook

  3. Bonds & Fixed Income

    Investing For Safety and Income Tutorial

  4. Fundamental Analysis

    Discounted Cash Flow Analysis

  5. Fundamental Analysis

    Ratio Analysis Tutorial

Trading Center