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.
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