EVERYBODY HAS A PLAN, UNTIL THE FIRST PUNCH LANDS. ANYBODY STILL BELIEVE THE MARKET’S NOT A FIGHT? WE HAVE A PLAN. KEEP YOUR CHIN IN. BUT THERE’S MORE.
EVERY MARKET’S DIFFERENT BUT THE RULES REMAIN THE SAME. AND REALLY, HOW MUCH MORE HELPFUL COULD THE MARKET BE? IT SHOWS US ABSOLUTELY EVERYTHING IT’S DOING, AS IT DOES IT. WHAT DO WE WANT, NARRATION? WELL, YOU HAVE THAT ALSO, RIGHT NOW.
SO WHAT TOOLS DO WE NEED TO MAKE SENSE OF ANY MARKET? THE FOLLOWING:
Our markets move in points. Points are translated into percentages. The move is either up or down, because zero movement isn’t trackable. Right. It’s obvious. Stop anyone on the street and they could tell you this. Yet the story has only begun.
THE ELEVEN CARD DECK
Our market includes three indexes; the Dow Jones Indus trials, the tech-heavy NASDAQ, and the broadly representative S&P 500. Knowing direction and distance are necessary for all three very different indexes.
2. Distance and Direction
How worthless is it to hear a market report that consists of “the Dow was up 58 points today?” If they say the Dow was up 580 percent today, well yeah. Think about it. How much have they really told you? They’ve told you a 30 stock index moved up, and a total of 58 points. Three pieces of info do not add up to an accurate picture of any day. We require more.
But every move in either direction involves more than distance and direction. Each includes a volume metric. Volume is the number of shares traded. Volume is the lie detector test. Heavy volume means truth. Weak volume means little to nothing.
Volume is measured by number of shares traded vs. an average over time; 5 day average, 10 day average, etc. Heavy volume over a shorter period means less. A 10 day average volume metric provides a more accurate long term picture of how any equity trades, in “normal circumstances.”
Periods of volatility, like now, create exaggerations in the longer averages. Using multiple volume metrics always gives the best picture. Think daily vs. weekly charts.
4. Breadth and Depth
Markets trade “broadly” or “narrowly.” Broad markets include moves from many sectors. Lately we’ve seen tech dominate the action, while financials, and often everyone else, sits out. That’s known as a “narrow” trading day. The more sectors involved in a trading day, the “broader” the action or market.
Markets also trade “shallow” or “deep.” Once again, lately we’ve witnessed very shallow trading. The terms refer to the number of companies substantially involved in the action. Several sectors may be moving, but not all companies in each are moving.
A deep market means many companies in a sector are moving. Up or down, most share prices are moving.
5. Advancer vs. Decliner Ratio
Every trading day presents a ratio of those stocks that “Advance” or “Decline.” The ratio reveals the makeup of the move, and the sentiment behind said.
CNBC employs a “heat map” displaying the entire S&P 500. 500 squares bean green or red, indicating advancers vs. decliners. The map provides a sense of the day. investor sentiment drives our markets. Advancers/decliners display the battle in real time, and historically.
6. Sector performance
How many of our 11 economic sectors can people name? As with all else, the more conversant we are with concepts the better our thinking. The economy leaves obvious footprints. We see those in the relative sector performance. Nearly every trading day we get yet another look at the “drivers” of the economy. How important is that?
Some may feel such “basics” as those above are nice but unnecessary. That’s like saying looking out the windshield and mastering gas/brake are nice, but annoyingly simple. Of course we all know everyone is an incredible driver.
Long term investing does not require a day by day grip on market action. Yet commanding this easy breezy 6-Tool Pack means any market is there for you to grasp, every time you need or want to. When you know it you own it.
Thanks for Reading. Keep Rolling.