Visualizing the pulse of Financial Markets
Welcome to my first post on my new financial blog.
It is important to know that everything you read here is just a way of expressing my opinion. Please do not consider it as financial analysis, consulting or buy/sell recommendation.
About me and my market observations
I do not consider myself a trader or investor. My goal is to find a way to put money into the capital market while reducing risks and anticipating big changes in trends.
In my personal investment plan for retirement, ETFs play a huge role. I like passive index fonds because they basically mirror stock indices.
Stock indices always represent parts of a market or a whole sector. In contrast to single securities, they represent a bride spectrum of exchange listed companies, and as a "group of stocks" they are less vulnerable to unexpected or extreme price movements.
This is why some general rules of analyzing or anticipating price movements apply, and I find it rewarding to understand such rules and observe how the markets follow them in most times of the year.
If asking professional traders or investors, it is highly interesting to learn how they view the markets and what tools or techniques they use to determine the current state of markets and what they would expect from them in the near future.
For example, in most cases, one would speak of fundamental analysts, trying to read the fundamental data of a company or market and then trying to give a forecast about the future development. In contrast to them, technical analysts look at a chart and see everything they need: inflation, fundamentals, nearly everything is already included by those who traded with the security.
Both of them have legitimate reasons to believe their approach is the best one.
For my personal style of observing the markets I chose an underestimated sub-category of the technical analysis: The so-called market breadth data (some also call it the market pulse or the "breathing" of the market).
The breadth data in detail
It basically goes like this:
One does not only look at the stock index itself, but also at its members and their performance. The performance of the members is then compared to the index' performance.
Let's do a quick deep dive:
For a market being represented by a specific index, try to determine if a price movement is carried by a wide range of index members or only by some big fishes.
This will give you a rough impression if the price movement is healthy and thus should be trusted or not.
The most easiest way to start such an observation would be to check how many index members advanced and how many declined for each day (including the current trading day) and the past.
(Instead of looking at index members, some prefer to look at all securities of an exchange, e.g. NYSE or NASDAQ; however, this approach might be too unspecific if you want to learn more about a specific index and not the whole market.)
Now, if the index price moved up, but only some index members advanced for that specific day, it could be that the market behind that index is not healthy. Well, it is wrong to assume that after looking at a single trading day, but if this is confirmed for a series of trading days, you should slowly gain an impression of what to expect from the next weeks or months.
The so called ADVANCED vs. DECLINED analysis, often being represented by the ADVANCE/DECLINE line indicator, gives a good impression of how many stocks advanced and how many declined over time.
There are multiple ways of how the information gained from this indicator can be involved in your trading decisions, but I will not cover this here.
As soon as you have the advanced vs. declined data for an index, you can calculate the McClellan Oscillator and McClellan Summation Index. They are based on the EMA19 and EMA39 of the ADV/DECL values and give short- (Oscillator) and long-term (Summation Index) signals.
Now, if you look at an index based on information from ADV/DECL, the McClellan Oscillator and the McClellan Summation index, you will have a good impression of the pulse of the market and find suitable signals for your personal investments.
I also like to enrich that data by looking at how many index members trade above their SMA50, SMA100 and SMA200. This gives confirmation about ongoing trends and the state of an index in total.
I believe that the indicators listed above give a good visualization about a market's breath or pulse as they would show how a market would rise and decline over time (like breathing in and out).
Those are the indices I like to observe
For my personal observations, I calculated the advanced/declined values, the McClellan Oscillator and the McClellan Summation Index for the following indices:
- DAX
- TECDAX
- SDAX
- MDAX
- Euro STOXX 50
- S&P 500
- Dow Jones
- NASDAQ100
- Nikkei 225
For the DAX index, I also generated data of how many index members would currently trade above their SMA50, 100 and 200.
All calculations I do are my own and only serve my personal observations; but since I already calculated them, I can aswell share them with others.
I took a long thought about how I would do that. One way of doing that could be having a small business selling this data; however, I don't think this would be appropriate.
But well, since I need servers and invested a lot of time in writing the tools for running those calculations, I also did not want to hand them out for free (e.g. here on the blog). This is why I decided to share my own observations on Patreon:
https://www.patreon.com/boersenklaus
I am not sure if someone actually would be interested in reading about my observations of the markets based on the market breath data, but even one single Patreon would help me pay for servers and even maybe for a developer to help me with my tools. The Patreon account has German texts, but I plan to change that.
What I will share on this blog
Honestly, I am not sure yet about what content I am going to share here and what remains on Patreon. Surely, I will respond to any request there is, so basically it could be up to you! Feel free to share your thoughts in the comments.
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