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What is short interest?
Short interest is a term used to describe how many short positions are open for a given security or market at a given time. It is often expressed as a percentage of the total securities outstanding and is used for the short interest ratio. This serves as a gauge of bearish market sentiment, since short-sellers are expecting price action to trend downward. The short interest ratio (SIR) provides a context for the quantity of short interest outstanding by stating this amount in relation to the average daily trading volume. Continue reading...
What is “efficient market hypothesis”?
The Efficient Market Hypothesis (EMH) states that it is impossible to beat the market consistently over time, since all available information is priced efficiently into stock prices. But what the EMH misses is the impact that sentiment can have on price discrepancies in the short-term. Emotions can lead to gross mis-valuations (as we saw with the tech bubble in 2000), and market corrections can see stocks selling off dramatically for no fundamental reason. Continue reading...
What is Consensus?
Consensus in investing is a measure of how in line investor beliefs are with one another. It describes strong trends in both trading and investor sentiment, often manifesting as bullish or bearish outlooks on a security or market. Bullish or bearish outlooks can be misleading, however. Opinions are not facts, and the noise of opinions from news sources and pundits can make opinions seem more factual than they are. Many investors require time to develop and form opinions, or form opinions for the wrong reasons, and can succumb to a herd mentality Continue reading...
What is a bull market?
Bull markets are defined as periods of sustained investor confidence and market growth, as prices trend higher and indexes rise over time. These stretches are typically tied to economic growth and strength. When investor sentiment is “bullish,” investors are generally willing to take more risk. These extended periods of growth typically last for months but can last for years. There are more technical definitions of a bull market, depending on which index, commodity, and other asset is being considered. As a general rule, however, bull markets tend to see stocks rise by 20% in response to a 20% decline, before eventually declining by 20% again to signal the end of the bull run. The longest bull run in S&P 500 history took place from March 2009 to March 2020, experiencing well over 300% growth over that time. Continue reading...
What are market indicators?
Market indicators are quantitative tools for the analysis of market information, which may hint or confirm that a trend or reversal is about to happen (leading indicator) or has begun (lagging indicator). Indicators are technical analysis algorithms which give investors signals that may be used as the guidelines for trading. Indicators might be called oscillators or have various other proper names, since some of them are quite well-known, but there are general conventions or instructions for how to use an indicator, how it can be tweaked to suit the scope of your analysis, and what is considered a trade signal. Continue reading...
What are Technical Indicators?
Technical Indicators are charting tools that appear as lines on charts, or as other kinds of graphical information, which serve as guidelines for buying and selling opportunities. They are based on mathematical formulas, and may be called oscillators, trading bands, and signal lines, among other things. Technical analysts use information about price, volume, standard deviation, and other metrics to construct systems for trading using mathematical formulas which can be translated into useful charting tools. The systems can bring discipline to a trader’s strategy by providing clearly defined circumstances in which a trader has reason to buy, sell, hold, and so on. Continue reading...
What is a leading indicator?
Leading indicators are economic or price data which have some degree of correlation with a movement in the market or a stock price. Leading indicators tend to happen before the market or price movement occurs. Traders and economists use leading indicators frequently to prepare for what’s next; they are based on theory as well as empirical historical evidence but like all indicators, they do not have a 100% accuracy rate – past performance does not guarantee future results. Continue reading...
What is a bear market?
Bear markets are loosely defined as periods when markets experience declines in magnitude of 20% or more. More specifically, bear markets are a period in which a major index like the S&P 500, for example, declines by 20% or more, with this decline sustained for a period over two months or so. Consequently, many investors become “bearish” – they lose confidence in the market, sell off their securities they do not believe will recover soon, and sit on the sidelines. There have been 25 bear markets since 1929, for an average of one every 3.4 years. Continue reading...
Is there any merit to the “Elliot market waves theory?”
The Elliot Wave theory essentially uncovers larger trends and investor sentiment by smoothing and “zooming out” from market price action. Elliot Waves zoom out on market price action by using larger-interval moving average and smoothing out price information to reveal larger trends. He was one of the first to attempt such a theory, and his foundations may have contributed to the use of Fourier Analysis and Fibonacci Sequences in market analysis. Continue reading...
What are the main technical indicators?
Technical indicators include moving average lines, trading bands, oscillators, and formations (found here), often presented in combinations. Popular indicators carry proper names. There are thousands of technical indicators, but the most popular ones are the MACD, Bollinger Bands, Stochastic Oscillators, the Directional Movement Indicator and various patterns of price behavior, such as “Head and Shoulder” formations. Continue reading...
What is a Buyback?
When a company decides to use excess cash to purchase its own shares from the market, it is called a buyback or “share repurchase program.” There are only so many things a company can do with earnings in excess of their projections; among these are issuing a dividend, paying off debts, expanding, acquiring another company, or buying back shares of its own stock. Buybacks are also known as Stock Repurchase Agreements. There may be guidelines in state law or the company’s contracts or buy laws that determine what options they have and how many shares can be repurchased. Continue reading...
Should I invest in gold?
Gold can provide diversification in a simple way, since it has a history of being generally non-correlated with most other asset classes. It is not necessarily a hedge against anything specific, as some claim, since its price movement is too random. Conventional wisdom says that investing in gold might be a good hedge against inflation or market cataclysms. Some of these beliefs are unfounded. The price of gold appears to go up only when it is in high demand (such as when the price has gone up some already), rather than in tandem to any specific market force such as inflation or interest rates. If investors have some idea of when other investors are going to pile in, such as during times of uncertainty, they will likely be able to ride an uptrend in gold prices for a while. Continue reading...
How to use Momentum Indicators in trading
A momentum indicator allows for a quick comparison of a security’s current price relative to its past prices using a flexible time period, allowing traders to decide the parameters. The formula to calculate momentum is M = V – Vx (where V is the current price and Vx is the closing price from x number of days ago). A current price in excess of past price is a positive momentum indicator; a lower current price represents negative momentum. Continue reading...
What are Earnings per Share (EPS)?
EPS is derived by taking the net income of a company and dividing it by the share price. That gives an individual investor an idea of how much growth was captured by their shares. Earnings per share is one of the main articles that is announced by the quarterly reports given by companies to their investors. Earnings per share does not mean that each share has appreciated a certain amount, but if the quarterly reports in earnings seasons stir up demand for the shares based on solid fundamentals at a company, it can result in a higher price per share. Continue reading...
What is a Value Stock?
Value Stock is a stock whose price has been deemed a value buy because of underlying fundamentals, book value, and projected earnings. Prices for stocks can temporarily be pushed around by sentiment, index tracking fund purchases, news and political effects, et cetera, and often the prices on very good and well positioned companies become undervalued as part of larger movements that overlook their inherent value. Continue reading...
Why Do You Want to Own the Shares of a Publicly Traded Corporation?
The idea is that a shareholder’s interest in a growing publicly traded company will become more valuable over time. The simplest answer is: to make money! Owning shares of a company’s stock is known as taking a long position, and this is done in the belief that the company is going to increase its earnings and profit margin into the future, or will at least remain steady. There are three ways to make money on stocks: Continue reading...
How to use the On-Balance Volume in trading?
On-Balance Volume (OBV) is a popular leading indicator introduced in the 1960s by Joe Granville. OBV is a line built using differences between daily trading volume – in Granville’s estimation, the major driver of market behavior – adding the difference on days that the market or stock moves up and subtracting the difference on days when the market or stock moves down. It looks for instances of rising volume that should correlate with price movement, but price movement has not occurred; additionally, OBV can be used to confirm lag. Continue reading...
What is market breadth?
Market Breadth is a descriptor that is used in several market indicators such as the daily breadth, the A/D Line, the McClellan Oscillator, and Arms Index. Breadth is the relative difference in the amount of advancing stocks and declining stocks. Daily breadth is simply computed by subtracting one from the other, or creating a ratio in which one is divided by the other. Daily breadth is closely related, even interchangeable, with the Advance/Decline ratio. It can also refer to the difference between New Highs and New Lows, or Net New Highs. Continue reading...
What are trading models?
Trading models are emotionless systems for decision-making in trading that can be automated or just used for reference. They tend to have logical parameters, such as “if x, then y” which can use popular trading indicators to implement a strategy that might only be used in certain conditions. Trading models are strategies employed with a specific design. Different trading models will use different technical indicators or types of charts to define and search for certain conditions in which a strategy can be used. Once the conditions are met, the model provides the decision-making logic that is intended to carry out a profitable trade without guesswork or emotion. Continue reading...
What is defined as a market correction?
Sometimes a stock or index will reflect prices that have become inflated or overvalued in the short-term as a result of bullish conditions. In some cases, due to shift in sentiment or a negative news story in the headlines, stocks may retreat suddenly and without notice. A market correction is a sharp, sudden decline in stock prices, where they fall in value by around 10% - 20% over a short period, usually no longer than 6 months. Corrections are frequent occurrences (typically an average of once a year) and are a normal and healthy part of equity investing. Continue reading...