What is Market Breadth after all?
It is now a well known fact that one can make money in Stock Market ONLY through Swing Trading, getting in and out of stocks within a matter of days or weeks. Long term investments are prone to extreme fluctuations in stock markets and expose to potential risk of losing more than you would have gained during a bull run. Hence, how do you invest smartly? By gauging what the market is saying. And how do you do that? You use our Proprietary Market Breadth to find out which way stock market will potentially make it's move. Let us explain this with an example to make it more clear.
Look at the chart below. From July 04 to July 09, 5 years, each time Market breadth indicator crossed above the 80 level, market corrected. It happened 8 times and market breadth indicator proved write 7 out of those 8 times. Same goes with the market reversal from bearish to bullish mode as is evident from the bottoms that this indicator formed before starting to move back up.
Now Look at the chart below. This is the SLOWER version of Market breadth. This version is a smoothened version of the original Market Breadth. Since this is a slower version, the tops and bottoms are NOT that frequent. Hence, we had to take a 10 year chart as opposed to a 3 or 5 years one. There are a couple of ways to interpret this chart.
- Whenever the chart hits extremes of either above 80 or below 20, it exhibits cautionary mode and potential reversal of trend.
- As you can see from the chart below, almost everytime this slow indicator went down AND started to move up, rallies were witnessed in the market and vice versa.
How to use the above charts and benefit from it?
These charts tell you ahead of time which way the markets would potentially move. For example, a reading of over 80 on either chart would mean caution. Either book profits when this happens or put strict stop losses. May Not a good time to go long though. Similarly, when the reading is below 20, it could mean extreme pessimism in the markets and could indicate good buying opportunity.
Market Value - A unique way of finding which way Nifty is going to trade What is Market Value after all?
Every company has a value and that is deduced from it's financial statements. One of the most popular Fundamental ratios used to figure out if a company's stock is expensive at CMP or cheap is by using something called P/E ratio. The higher this ratio, the costly the stock is.
A higher P/E ratio however does NOT mean the stock is expensive and one should not buy it. Why? Because, a well sought after stock will always be in high demand irrespective of it's fundamental value. For example, Infosys or TCS during the late 90's which had extremely high P/E's but still had their share prices going up.
Similar to individual stock's P/E, you have the overall market P/E. For example, the one that we track on this page (with a link below) is for Nifty. Why is this important to you? Because this is what dictates (for the most part), if FII's and institutional investors should consider investing in the Indian market. Finding value that is. If P/E for the entire market is low, then you will see lot of demand and investment. Likewise the opposite when P/E is high. Take a look at the chart below.
In the chart above, every time Nifty P/E went above 21+, it signaled danger as markets went down sooner or later. There hasn't been a single instance where markets rallied more than 10-15% AFTER breaching the 21 P/E level in the last 10 years. Similarly, whenever Nifty's P/E went below 13, markets stabilized and moved back up.
How to use the above charts and benefit from it?
Though the above chart is NOT Technical analysis, it is good to have a broader picture in mind before investing either from long/short or daytrading perspective. Why? Because in essence, if you can predict the trend before others, then you are one step ahead of them and would be able to invest more wisely.
Now you know how to understand the market breadth and market value, have a look at current charts for market breadth and market value.
