BROAD MARKET INDICATORS
One of the best things that a trader can do to keep himself on the right side of the market is to watch a series of indicators that will show him the market’s trend. Oftentimes different segments of the market will outperform others and we can determine that as well. There is one indicator that we watch to see where the really BIG money is betting the market will go, there is another that we watch to monitor investor fear and even another contrarian indicator that monitors investor sentiment.
Here is a list of the things I watch, their ticker symbols and why I watch them.
$SML
This is the S&P Small Cap 600 Index. I watch this because it is not uncommon when the large cap stocks to lag in performance that investors will start to move their money into the small caps.
$DJIA
This is the Dow Jones Industrial Average. Even though I do not consider the Dow to be a true reflection of the broader market, many people hold it up as the market benchmark so I place it on my list of things to watch. You have probably noted that the ticker symbol is not the $DJIA that most of you watch. There is a reason for that; the DJ-067 is an index ticker symbol against which I can compare the Commitment of Trade Report. This is not possible with the $DJIA symbol.
GC-067
This is the ticker symbol for the Comex Gold Index. Gold is often moves in opposition to the market. When the market becomes too unpredictable in its direction many investors move their money into gold and I watch gold closely to see if money is leaving the market.
QQQQ
This is the ticker symbol for the tracking index for the NASDAQ 100. The NASDAQ 100 represents the largest 100 stock traded on the exchange. As such it is an important item to watch in measuring the strength of the tech sector.
$RUT
This is the ticker symbol for the Russell 2000. This gives me the ability to watch many mid-cap stocks that provide much of the backbone of the market and see when they are moving into or out of favor.
$SPX
This is the ticker symbol for the S&P 500, which is probably the most important index for you to watch because it represents 500 of the largest traded companies, and is truly the most important broad market indicator. It also has another roll in that it is the standard of calculation for the COT Commercials Index.
That concludes the list of things that we can use to create a Symbol Group labeled “Broad Market Indicators”. There are two more items that you should learn to watch that could give you some idea of potential market direction. The word “potential” packs a great deal of significance. All of the things we added to the “Broad Market Indicators” Symbol Group represent what is, these last two represent what may become.
The first we will look at is the Volatility Index or $VIX. The VIX measures the implied volatility in the prices of a basket of options on the OEX (S&P 100). It can be used as a tool to measure investor fear and can be highly effective in determining market bottoms. To a lesser degree it can be used to spot market tops but is best used for spotting bottoms. One of the powers of this indicator is that it works equally well in both bull and bear markets. High readings above 50 represent increased fear levels in investors and often indicate capitulation points when fear drives them to finally sell out of their market positions. Readings below 20 can represent the investor complacency noted at market tops.
Charts of the $VIX can be obtained on your “Extreme Charts”
The second indicator that will look at is available on the “Extreme Charts” charting software. This is the Commitment of Trade Report or COT. Having the largest traders in the world report weekly on their long and short positions held generates the COT. They file their report on Tuesday and three days later on Friday it is presented to us.
It is broken down into three groups. The first group is the Commercials which are mostly foreign banks and are the BIG bucks investors. The Commercials are looking weeks and months ahead and for the most part do not care what the market is doing currently. This BIG money is either buying or selling the market and they end the trends. They primarily trade the S&P 500.
The second group is the Large Speculators which is made up mostly of US institutional investors. The Large Speculators are great for trends but are terrible for spotting turns.
The third group is the Small Speculator and I do not watch them at all because they are typically on the wrong side of the market!
It is very important to NEVER use the COT reports as a market-timing tool! It is best to think of it as the “red zone” on a football field. When the COT gets over 80 or below 20 pay close attention to your other technical indicators. If the COT has been trending down and you get a sell signal, take it. If the COT has been strong and you get a buy signal, take it.
The last indicator we will look at is also provided with the “Extreme Charts” software, it is the Larry William’s Sentiment Index. Larry has created a contrarian indicator that is firmly based in the belief that the public is typically wrong. He has factored several things into his indicator; put/call ratios, what newsletters are saying, brokerage reports and some others.
It is used in the following fashion. If the LW Sentiment Index is below 20 look for a bullish trend to come within the next two months or less. If the LW Sentiment Index is above 80 look for bearish trend to come within the next two months or less.
If you can discipline yourself to look at these broad market indicators on a regular basis you will be much better equipped to keep yourself on the right side of the market and to even prepare yourself for market changes to come.