Advance Decline Volume (ADV) & On Balance Volume (OBV)
Arms Index (TRIN)
Credit Spread
McClellan Oscillator and Summation Index
Purchase Types
Put/Call Ratio
Selling Short
Short Interest & Short Ratio
Tick
Valueline arithmetic & geometric indexes
Volatility Index
Advance Decline Line
The Advance-Decline Line is the most cited and least understood of all market indicators. The most commonly cited A-D Line is simply a running total of the daily advances minus declines for the NYSE; however, an A-D Line can be calculated for any market index for which daily advancing and declining issues are reported. The resulting A-D Line is a measure of "breadth", a common term applied to advance-decline indicators. The A-D Line is compared to its related market index to see if price and breadth are moving together. |
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Put/Call Ratio
definition from Decision Point
When put volume becomes excessive in relation to
call volume, it is an indication of excessive bearishness in the market, which is usually bullish.To calculate the Put/Call Ratio simply divide the number of puts by the number of calls. The raw ratio can then be smoothed into a moving average. We use a 10-day moving average.
Sometimes the CBOE final data is so late that we estimate the final volume based on the 3:00 PM ET CBOE tape, therefore, if you are using our Daily Market Summary to collect the data, you should be sure and get the corrected figures on the report the following day.
On our charts we reverse the scale so that oversold readings show as bottoms and overbought readings as tops.
This is from Hays Market Forecast Page
3 Minus 39 Week Equity Put/Call Ratio
This is one of the best of all psychological indicators. It measures the current level of fear to greed by the worst group of investors of all--the equity option trader. We use the weekly equity put/call volume numbers as included in Barron's each week. Most option traders lose money, and are always the most wrong at the extremes. In other words when they get extremely greedy (low put-call ratio), a wise investor should be getting very cautious-and vice versa. Therefore, when the 3-week average of the put/call ratio moves 12% above the 39-week moving average, it typically means that the pessimism by these typically wrong speculators is about as bad as it is going to get. The 12% line is the line that receives many more tradable signals, but once in "blue moon," this ratio really has a panic attack that pushes it above the 20% level. When this occurs, in the past it has been setting the stage of one of those very rare and best market buying junctures that only come as intense fear is vastly overdone.
Also from Hays Market Forecast Page
Equity Put/Call Ratio
As the name implies this indicator simply compares the daily volume of the equity puts to that of the calls that are traded on the CBOE. This data is given each day on the CBOE's excellent website. It is an excellent way to measure points of overdone optimism and pessimism. It is a contrary indictor, and the signal attempts to go exactly opposite to the moods of these usually wrong option traders. This indicator has been very good in the past on a penetration of the 72% level. Very rarely, this will move to 90%, and that has been a sign that a significant bottom is extremely close.
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Selling Short
definition from shorting stocks
The short sale of stock is a bet that the price of that stock will decline. Here are the mechanics. You decide that XYZ at a price of $110 is at or near its peak. You feel that XYZ will decline in price from this level. So you want to short the stock. You tell your broker you want to short 100 shares of XYZ at 110. You borrow from your broker 100 shares of XYZ at $110 and sell it to someone else.
This is the nature of the short sale. You're selling something which you borrowed. Again, you borrowed 100 shares of XYZ at $110 and sold it to someone else. You actually borrowed the 100 shares of XYZ from your stockbroker. He either has it in inventory or he borrowed it from a client or another brokerage firm. Either way, it is your broker who loans you the stock to sell to someone else.
So now what happens. Hopefully, the price of XYZ goes down for you. Let's say that XYZ declines to $85. At 85, you decide that XYZ may not decline much further, if at all. So you want to take your profits. How do you do that? You now buy 100 shares of XYZ at $85 and pay your broker back the 100 shares of XYZ. You borrowed the stock at 110 and paid it back at 85. You made $25 per share in profit or $2,500. You sold the borrowed stock for $11,000 and bought it back for $8,500.
Conversely, suppose the price of XYZ goes up to $125. The investor would have sold the stock for $11,000 and now might want to get out of the position. He would now have to go into the market and buy 100 shares of XYZ for $12,500. He would then be returning the loaned stock at $12,500. In this case, he has a loss of $1,250.
The potential loss on the short sale of stock is unlimited. This is because a stock can theoretically rise infinitely. Therefore, to protect himself, the short seller should always use a 'buy stop' order GTC (Good Till Canceled). The investor might decide that if the price of XYZ rises $5 he wants to get out of the position. He would place a buy stop order at $115. Then, if the price of XYZ rises to 115, he is assured that he will get out at about 115. Remember, a stop order becomes a market order when hit. Therefore, there is no guarantee that he will get out exactly at 115. But he will get out at 115 or about 115. One can also place a limit order when he wants to get out of a short position which went up. This will get him out at exactly that price. However, there is no guarantee that the trader will get out. He could miss the market.
You may also want to get out of a short trade when you have hit a certain amount of profit. In this case, the investor would use a buy stop at his maximum loss level and a buy stop at his profit target level. This is called an either/or order. You are placing two orders to protect you if the stock rises and to take profit if the stock declines. By the way, this either/or type of order can also be used when buying stock. You can protect yourself against a loss if the price declines and also to take profits when the stock rises.
For the most part, brokerage firms do not place a time limit on the shares of stock they loan. This is because they make a commission both ways. And also, they want to keep the customer happy. Also, you should know that a short sale can only be made on an uptick in that particular security. That is, if you want to short a stock at 110, the short sale can't be made unless the previous trade was at 109-7/8 or lower. Otherwise, in a rapidly declining market, short selling into the decline would aggravate the decline. And remember, the ticker tape is a continuous tape. It doesn't start new every day. So today is a continuation of yesterday. You can't get around the uptick rule by waiting for the next day.
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Short Ratio & Short Interest
Short ratio (or short interest ratio) MarketVolume Stock GlossaryNumber of Shares of a security that investors have sold Short divided by Average daily volume of the security (measured over 30 days or 90 days). There are various interpretations of this ratio. When people short, it is usually (but not always) because they are pessimistic about the security`s Future performance. Shorting involves buying at at some Point however. Hence, some would interpret a High short Ratio as an indicator that there will be some buying pressure On the security that would increase its price.
Short Interest (Nasdaq Financial Glossary)The total number of shares of a security that have been sold short by customers and securities firms that have not been repurchased to settle short positions in the market.(See also Short Selling,Days to Cover, Settlement Date,and Average Daily Share Volume.)
Short Interest - The Investing Guys (Investopedia.com)
As most of you probably already know, short selling gives a person the ability to profit from a falling stock. Short selling is the selling of a security that the seller does not own. Essentially you borrow a security then sell it, aiming to replace those borrowed shares by buying them back at a lower price. The difference is your profit. Of course, if the stock goes up from the price at which you sold the borrowed, you lose.
There are brokerage departments and firms whose sole purpose is to research prime short-selling candidates. They pore over financial statements looking for weaknesses or a company that is too expensive for its own good.
Short InterestShort interest is the total number of shares of a stock that have been sold short but not yet covered, usually expressed as a percentage. Most stock exchanges track the short interest in each stock and issue reports at the month end. This is great because it allows investors to see what short-sellers are doing.
A large increase or decrease in a stock's short interest from the previous month can be a very telling indicator of investor sentiment. A high (or rising) short interest means that a large amount of people believe a stock will go down. If short interest is rising, your best course is to check the current research and news reports to see what is happening. In these cases a high short interest stock should be approached with extreme caution but not necessarily avoided at all cost. Short-sellers (like all investors) aren't perfect and have been known to be wrong from time to time. Many contrarian investors use the short interest as a tool to determine direction. They feel that the opposite is true: that a high short interest ratio (which we will discuss below) is bullish because it indicates there will eventually be significant upward pressure on price as short-sellers cover their short positions.
Short Interest RatioThe short-interest ratio, different from short interest, is the number of shares sold short (short interest) divided by average daily volume. This is often called the "days to cover" ratio because it tells, given the stock's average trading volume, how many days it will take short-sellers to cover their positions if good news sends the price higher. The higher the ratio, the longer it would take to buy back the borrowed shares. Short-sellers therefore use the ratio. If too many shares of a given stock have been sold short and if days to cover stretch past eight or more days, covering a short position could prove difficult.
The NYSE short ratio is another great metric used to determine the sentiment of the overall market. The NYSE short ratio is calculated by taking the monthly short interest on the entire exchange and dividing it by the average daily volume of the NYSE for the last month. For example, if there were five billion shares sold short in August, we would divide that by the average daily volume on the NYSE for the same period, say, one billion shares per day. This would give us a NYSE short ratio of five. This means that, on average, it will take five days to cover the entire short position in the NYSE. A higher ratio means there is a more bearish sentiment on the exchange.
Short SqueezeSome bullish investors see a high short interest as an opportunity. This outlook is the short-interest theory. You see, if you are short selling a stock and the stock keeps rising, you will most likely want to get out before you lose your shirt. A short squeeze occurs when there is a lack of supply; short sellers scrambling to replace their borrowed stock tends to force prices upward. Short squeezes tend to occur more often in smaller cap stocks, which have a very small float (supply), but large-cap stocks are certainly not immune from this situation.
If a stock has a high short interest, short positions may be forced to liquidate and cover their position by purchasing the stock. If a short squeeze occurs and enough short sellers buy back the stock, the price goes even higher. Unfortunately this is a very difficult phenomenon to predict. Buying stocks only in hopes only for a short squeeze is a strategy for fools.
Conclusion An investment decision should not be based entirely on the a stock's short interest; however, investors often overlook this little ratio even though it is still so widely published. Unlike other fundamentals for a company, the short interest requires no calculations. Half a minute of time to look up short interest can help provide insight into how other investors are feeling towards the company.
Specialist Short Ratio (Investor's Advantage - describing their indicators)
This indicator is used to determine what the Specialists are doing. The Specialists are people on the floor of the exchange that are in charge of maintaining an orderly market. Each Specialist may handle one or more of the stocks listed on the exchange. Specialists are where the action is, they know what is going on by being there. A Specialist is allowed to trade on his own behalf.
This is where the Specialist Short Ratio comes in to play. If the Specialist determines that market is going to move lower, he/she may decide to Short shares of stock. That is sell stock that he doesn't own (by borrowing it from somebody else) knowing that he can buy it back at a later date and a lower price to pay the stock back. The resulting difference is his profit. Since the Specialist is generally right, we use this indicator as an integral part of our market analysis tools.
Every week in the Barron's Market Laboratory under Week's Market Statistics the figures for Total Short Sales and Specialist Short Sales are listed. You must enter these two figures as listed (that is in thousands of shares) on a weekly basis. The percentage of Specialist Short Sales to Total Short Sales is calculated by the program. The resulting calculations are smoothed using a 10 week simple moving average. These figures are then plotted on your screen.
When the Specialist Short Ratio is moving upward that means that short sales by Specialists is taking place at a more rapid rate than normal. This indicates weakness in the market has been detected by the Specialists and that caution should be taken, because the market will soon move lower.
When the Specialist Short Ratio is below 40% it generally means that the Specialists are Bullish and you should be too.
One minor thing should be noted here is that the information in the Barron's Market Laboratory for the Specialists is about three weeks old by the time that you see it. For most people this information is current enough.
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The tick is the upward or downward movement of a stock's price. (i.e. "It just ticked up.") The TICK, usually given as one of a number of market indicators, refers to the net tick on their last trade of all stocks being traded on a given day.
This information is useful in determining the current direction of the market and strength of the market in a given direction. For example, the market could be up 50 points, but, if the TICK were -400, it would indicate that the market had changed directions and was heading down. Or the market could be up 50 points with a tick of +750. This would indicate that the market was likely to go much higher since the momentum is clearly up.
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definition from valueline Published March 22, 2002
Comparing the Value Line Indexes
We receive many inquiries from our subscribers regarding the differences between the Value Line Arithmetic Index and the Value Line Geometric Index. In response, we are partially reprinting and updating an article that first appeared in Selection & Opinion on December 10, 1993.On June 30,1961, we introduced the Value Line Composite Index. This index assumes equally weighted positions in every stock covered in the Value Line Investment Survey. That is, it is presupposed that an equal dollar amount is invested in each and every stock. The returns from doing so are averaged geometrically every day across all the stocks in the Survey, and consequently, this index is frequently referred to as the Value Line Geometric Index (VLG). The VLG was intended to provide a rough approximation of how the median stock in the Value Line universe performed.
Calculating the Value Line Indexes
The VLG is calculated in the following manner. First, for each stock, compute the ratio of its closing price today to the close on the previous trading day. For instance, if IBM goes from 102 to 104 in one day, its ratio is 1.020. Conversely, if Wal-Mart goes from 61 to 59, its ratio is 0.967. The next step is to multiply all of these ratios together, forming a single number. Finally, raise this quantity to the power defined by the reciprocal of the number of stocks in the index (usually this is a number between 1600 and 1700). The result is the ratio of today's VLG price to the previous trading day's close. To derive the percentage price change, simply subtract 1 from this value and multiply the result by 100.On February 1, 1988,Value Line began publishing the Value Line Arithmetic Index (VLA) to fill a need that had been conveyed to us by subscribers and investors. Like the VLG, the VLA is equally weighted. The difference is the mathematical technique used to calculate the average price change of stocks in the index.
The VLA is calculated in the following manner. First, compute the ratio of every stock's price change in the same way as described in the first step of the geometric calculation. Next, add all of the ratios together. Finally, divide the total by the number of stocks. The result is the ratio of today's VLA price to the previous trading day's close. Again, to get the percentage price change, subtract 1 from this figure and multiply the result by 100. Upon VLA's introduction in 1988, the index values were computed on a daily basis back five years to the beginning of 1983 to provide an historical frame of reference.
Differentiating the VLA and VLG
The VLA provides an estimate of how an equal-dollar weighted portfolio of stocks will perform. Or, put another way, it tracks the performance of the average, rather than the median, stock in the index. It can be proven mathematically that the maximum daily ratio attainable by the VLG is equal to the daily ratio of the VLA. However, this special case can only occur when every single stock in the index has the exact same percentage price change on a given day-a highly unlikely scenario. For all practical purposes, then, the daily percentage price change of the VLA will always be higher than the VLG. The systematic understatement of returns of VLG is a major reason that the VLA was developed.The wide-ranging coverage of the Value Line Investment Survey and its equally-weighted nature made the VLG very appealing conceptually as representative of a typical retail investor's portfolio. The VLG also has appeal to institutional investors as a proxy for the so-called "mid-cap" market because it includes large cap, mid cap, and small cap stocks alike. Because of this interest, the Kansas City Board of Trade instituted trading in Value Line Index Futures in 1982. However, the performance of the VLG over time proved to underestimate the portfolio performance by too large a factor. For example, in the latest three-year period (ended December 31, 2001), the VLG had an annualized price change of -6.1% in comparison with 10.9% for the VLA. Accordingly, it was easy for astute investors to "game" the early Value Line futures with a representative basket of the underlying securities, since the basket would always outperform the VLG. The VLA price changes are much closer to the returns that would be derived by the underlying basket.
Moreover, while the differences between daily price changes may seem small, the magnitude of the annual differential between the two indexes is prodigious. The accompanying bar graph shows that for the ten-year period ending December 31, 2001, the difference in the average annual price change between the VLA and VLG averages is approximately 10%. Indeed, our latest data show that the differences between the two averages have actually increased in the three shorter time frames, reaching nearly 17% for the one-year period. We explain the mounting discrepancy between the VLG and VLA by first noting that the volatility of the stock market has been rising in recent years, with particularly wide swings in 2000 and 2001. In addition, it is important to realize that the VLG will work to filter out market volatility, since it effectively tracks the median of our universe of stocks. Meanwhile, the VLA, by its construction, will tend to capture the upside of the market swings. Taken together, then, these facts account for the widening differences between the VLG and VLA as the time span in question decreases.
It can also be argued that the VLA somewhat overstates returns of the equally-weighted basket of stocks, since it does not assess the transaction costs that would be entailed by following the strict discipline of daily rebalancing to bring the portfolio back to equally-weighted positions. However, our research shows that quarterly rebalancing closely tracks index performance while mitigating transaction costs.
Other Major Indexes
How does the VLA differ from the two most popularly quoted indexes: the Dow Jones Industrial Average (DJIA) and the S&P 500 Index? There are two major differences: the weighting scheme and the number of stocks.The S&P 500 is weighted by market capitalization. As such, stocks with large market caps account for much of its monthly price fluctuations. And although the S&P 500 has tended to "outperform" the VLA in recent years, reflecting investors' preference for large, easily-traded stocks, the reverse has been the case in the last couple of years. This situation is probably best explained by noting that a number of the dominant constituents of the S&P 500 in recent years have been large, high-tech issues. And that investors' appetite for technology shares weakened considerably in 2000 and 2001. Moreover, there was significant tax-loss selling at the end of 2000, and then investors bought back many of these stocks in the following January. That is, there was a pronounced January effect in 2001. The January effect will benefit the VLA over the S&P 500 given the "effect's" small-cap nature.
| Which one of these two indexes may be more appropriate, depends on ones goals. The VLA is much more comprehensive, including all of the companies in the S&P 500 along with almost 1200 other companies of interest to our subscribers. Nevertheless, more comprehensive indexes, such as the market weighted Russell 3000, also exist, providing even a broader view of market performance. The Dow Jones Industrial Average is valued mostly for its long history and its simplicity. It consists of only 30 stocks-all of which are included in the VLA-and it was originally designed for easy computation on the back of an envelope. This index is weighted by the price-per-share of each of its component stocks. That is, a 10% gain in a stock that sells at $90 influences its price movements three times as much as a 10% gain in a $30 stock. In truth, there is no rational justification for such a weighting scheme other than that it was simple to calculate before computers were available. Moreover, few investment professionals would consider any basket of 30 stocks to be representative of today's U.S. stock market. Nevertheless, it is useful to understand these differences because the DJIA is still the single most frequently quoted barometer of market performance. Although fourteen years have past since its inception, we still get many questions on the VLA, and continue to learn more about its behavior. The fact that interest in it continues to be expressed underscores its value as a measurement tool. |
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Volatility Index
definition from Decision Point by Nicholas Proffitt
The VIX is calculated by taking the weighted average of the Implied Volatility of 8 OEX calls and puts with an average time to expiration of 30 days. As such, it measures fear and optimism as manifested in OEX options activity. When large numbers of traders become fearful, the VIX reading rises, and when complacency about the market reigns, the VIX reading falls. And since the vast majority of put/call buyers are wrong and lose money, it's usually a smart move to fade (go counter to) what the VIX says the the crowd is doing.The VIX is an INVERSE indicator, which means that high readings are oversold (excess of bearishness) and low readings are overbought (excess of bullishness). Because of this Decision Point displays the VIX chart with an inverted scale to make its interpretation more intuitive -- overbought readings show at the top of the chart and vice versa.
Raw VIX numbers are of very little value. The VIX indicator is most useful when used in combination with some type of overlay, and preferably one that employs channels or bands. Some technicians use Bollinger Bands for this purpose, TraderNick uses a short term (3 months or so) linear regression channel, and for the Decision Point chart Carl has chosen 15% bands calculated from a 20-day EMA of the daily VIX close. When used in this fashion, it is the VIX position within the channel that's important, rather than the raw number reading.
The charts below show the wide range of the VIX over time and also show how the bands help define the limits of overbought and oversold under varied market conditions. Between December 1998 and June 1999 the VIX reading ran in a range between the low 20s to around the 30 level. Every time VIX hit the low 20s, the market was primed for a sell-off. And every time its snuggled up to the 30 level, it presaged a market rally. While the range during this period was between the low 20s and 30s, there were VIX readings as high as 60 and as low as 17 during the 12 month period beginning June 1998. On July 20, 1998, right at a market top that led to a 20% sell off, the VIX bottomed at 16.73. On Oct. 8, 1998, at the bottom of that bear move and the beginning of a powerful rally, the VIX put in a high of 60.63.
Hayes says this: The Volatility Index is a measure of the volatility of the options that are listed on the CBOE. We don't use this as a short term indicator since I never found exact levels that are historically accurate to predict rallies or corrections. My lack of confidence in the VIX as a short or longer-term indicator was verified in a very in-depth report just completed by a Merrill Lynch Quantitative Analyst that found no consistent predictive abilities of this indicator in past market history. I agree except in the rare cases that it moves above 45, and that has ALWAYS indicated a major buying juncture for the long-term investor.
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