What are Market Indicators?

Market indicators are quantitative in nature and seek to interpret stock or financial index data in an attempt to forecast market moves. Market indicators are a subset of technical indicators and are typically comprised of formulas and ratios. They aid investors' investment / trading decisions.

Understanding Market Indicators

Market indicators are similar to technical indicators in that both apply a statistical formula to a series of data points to draw a conclusion. The difference is that market indicators use data points from multiple securities rather than just a single security. Often times, market indicators are plotted on a separate chart rather than appearing above or below an index price chart.

Most stock market indicators are created by analyzing the number of companies that have reached new highs relative to the number that created new lows, known as market breadth, since it shows where the overall trend is headed.

The two most common types of market indicators are:

  • Market Breadth indicators compare the number of stocks moving in the same direction as a larger trend. For example, the Advance-Decline Line looks at the number of advancing stocks versus the number of declining stocks.
  • Market Sentiment indicators compare price and volume to determine whether investors are bullish or bearish on the overall market. For example, the Put Call Ratio looks at the number of put options versus call options during a given period.

Here's an example of the NASDAQ Advance-Decline Issues index:

Example of an advance-decline index.

Key Takeaways

  • Market indicators are quantitative in nature and seek to interpret stock or financial index data in an attempt to forecast market moves.
  • Market indicators are a subset of technical indicators and are typically comprised of formulas and ratios.
  • Popular market indicators include Market Breadth, Market Sentiment, Advance-Decline, and Moving Averages.

Popular Market Indicators

There are hundreds of different market indicators covering various indexes in the United States and around the world, including the NYSE, NASDAQ, AMEX, TSX, TSX-V, and various options exchanges.

Some of the most popular market indicators include:

  • Advance-Decline Issues - The ratio of advancing to declining securities at any given point in time. Since the indexes are weighted by market capitalization, this is helpful in determining true sentiment rather than just looking at the performance of the largest companies in a given index. Examples: $NYAD and $NAAD.
  • New Highs-New Lows - The ratio of new highs to new lows at any given point in time. When there are many new highs, it's a sign that the market may be getting frothy, while many new lows suggest that a market may be bottoming out.
  • McClellan Oscillator - This oscillator uses a moving average of highs and lows to help smooth out market breadth and make it easier to interpret rather than looking at choppy charts showing the raw numbers. It ranges from +150 to -150.
  • Moving Averages - Many market indicators look at the percentage of stocks above or below key moving averages, such as the 50- and 200-day moving averages. Examples: $NYA50, $NYA200, $NAA50, and $NAA200.