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Indicators based on the "advances" and "declines" concept -
Why to Analyze Indexes?
Why do many professional traders and fund managers, track
and analyze the major indexes - even if they trade only individual stocks,
options, or futures?
Why should the individual trader or investor analyze indexes, rather than
just particular stocks they own or trade?
- Indexes best describe the mood of
the market as a whole. Regardless of what you trade - stocks, options,
futures, or a particular index or sub-index - most trading vehicles tend to
move in concert with the broad market. As a rule, it is generally the broad
market, or at least a specific market sector, that dictates the direction of
a particular security - certainly rarely if ever the other way around. Even
if you do not trade at the index level, it still makes sense to keep tabs on
index performance – even if only on a cursory level;
- For numerous market participants
around the world, various index derivatives - such as index options and
futures on indexes – have become highly popular trading tools. The success
of index derivatives over the past few years can partly be attributed to
their high liquidity. In 2004, for instance, the wildly popular index shares
– the QQQQ ("Qubes”) – traded an average of about 100 million shares per
day. At these lofty levels the Cubes rival the volumes of some of the
biggest equities around the world. Rather than exclusively buying and
selling individual stocks, many investors are now also trading Exchange
Traded Funds (ETFs), making ETFs one of the most popular trading vehicles
worldwide. This is yet another reason that speaks for index analysis;
- There are some valuable technical
indicators that can realistically be applied only to entire baskets of
stocks (i.e., to indexes). Market breadth indicators are one good example.
It makes sense to use such index-specific market gauges to better define
trade entry and exit points - even if you do not deal in index derivatives;
- We strongly believe that every
market participant should – at the very least – be familiar with the current
"Market Status” (i.e., the market outlook for the mid- and long-term). For
instance, many short-term traders wish to avoid trading against a prevailing
mid-term trend, as going short during a market that is trending higher over
the mid-term could be a risky endeavor. But only index analysis can
generally provide a fair assessment of the prevailing market mood. The
analysis of an individual stock may not be able to deliver an adequate
market picture.
We have presented several compelling reasons why index
analysis is vital for traders and investors alike. We strongly encourage all
market participants to incorporate index analysis into their own investing and
trading strategies. The results can be well worth the effort, even if only to
complement or fine-tune personal strategies.
Next
A. v. S.
V. K.
Copyright 2004 - 2009 Highlight Investments Group.
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