Market Timing Indicators

Market Timing Indicators:

1.

Arms Index - It is assumed that price tells what is happening, while volume tells how it is happening. To look at either factor alone, not taking the other into consideration, gives an incomplete, and often erroneous picture of the market. By comparing advancing stocks and declining stocks to the volume of trading occurring on those advances and declines it recognizes underlying pressures which are not apparent in just a price study. The basic formula for the calculation of the ARMS index is: (A / D) / (AV / DV).
Results that are under 1 are bullish, as the advancing stocks are receiving more than their share of the volume. Our signals to buy are produced not by other people buying but by other people selling. We are looking for situations where an emotion be it fear or greed has run for too long. This puts us into the contrarian camp. We want to trade against the crowd, recognizing those times when the public has let fear prevail over reason and has sold stocks indiscriminately. The buy signal on a 3 day moving average is 1.4 and sell at 0.6. The 4 day average gives better signals at 1.3 and 0.7. The 21 day average signals are at 1.2 and 0.75. Combining indexes, 21 day and the 55 day we would want to be in the market when the faster line is below the slower. We would want to be out of the market when the 21 day is above the 55 day. When the faster index is high it is bearish, when it is above the 55 index, it is more bearish than the norm for the market. The 4 day index and the 13 day index works as a short term indicator. Even longer values which seem effective are the 55 and the 89 day average. Newton Zinder was one of the people to recognized that a reading over 2 for two days in a row as a buy signal. Argus investments chose 2.65 as there buy signal for any one day and would sell 8 months later. There study covered 20 years of market history and resulted in 11 buys. Only 1 produced a loss. During this period the market was up 192 percent while the trades produced 441 percent and they would have been out of the market 1/2 of the time. Find what time frame works best for you!!

2.

Oscillator - the oscillator is a 10 day simple moving average based upon the net differential of the number of advancing stocks and declining stocks on the NYSE. Typically speaking, the oscillator is over 350 this is a sign that the market is overbought on a short term basis and when the indicator is below -275, the market is oversold on a short term basis.

Overbought and oversold have to do with momentum and not necessarily price. Just because a market has slid in a big way does not necessarily mean it is oversold -- and vice versa. Since this is a momentum-related measure, one should be more concerned with the magnitude rather than the actual level of the move. For example, a truly weak market can get oversold and stay oversold by simply gaining downside momentum. Because we are concerned with the magnitude of the oscillator, we use it to judge the strength of the move. A reading of less overbought (i.e., a lower peak) accompanied by a higher high in the Dow Jones Industrial Average would be considered a negative divergence, as the momentum on this move was less than the previous move.

Therefore, when we get a peak reading in the oscillator in conjunction with a high in the Dow or the S&P 500, we conclude the market is overbought. After the market backs off some and begins to rally again, we will measure the magnitude of that rally by watching to see if the oscillator can better its previous reading. If it betters its previous overbought reading, the momentum is intact. If it turns down shy of the previous peak, we conclude momentum is waning and label that a negative divergence. It says to be cautious in here. The same holds true for declining markets, where the tendency is for a market to become oversold.


3.

Volatility Index (VIX) - The CBOE Volatility Index® (VIX®) is a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices. Since its introduction in 1993, VIX has been considered by many to be the world's premier barometer of investor sentiment and market volatility. The formula uses a kernel-smoothed estimator that takes as inputs the current market prices for all out-of-the-money calls and puts for the front month and second month expirations. The goal is to estimate the implied volatility of a synthetic, at-the-money option on the S&P 500 index, with 30 days to expiration.

Generally when the VIX is less than 11, the market is overbought. When the VIX is greater than 18 the market is oversold. This indicator is generally useful for more longer term investment entry points. http://finance.yahoo.com/q?s=%5EVIX

4.

Bull / Bear Ratio - The bull / bear ratio is a contrarian indicator, like most indicators and measures when people are becoming too bullish and / or too bearish. When the Bulls are greater than 60%, this indicates an overbought market. When the Bulls are less than 40%, this indicates an oversold market.

5.

Put / Call Ratio - The put / call ratio is also a contrarian indicator, like most indicators and measures when people are becoming too bullish and / or too bearish. When the p/c ratio is greater than 0.70, the market is oversold and provides a good indicator to buy. When the p/c ratio is less than 0.60, the market is generally overbought and provides a good indicator to sell.