Given the complexities in
market, there are many indicators which investors may look at to derive
of the market. We have selected a list of indicators which are easy to
and have implications which investors can easily relate to. We have
to look at the historical implications of these indicators on the stock
to gauge each indicator’s relevance.
For the ease of
description, we have
separated these indicators into 2 different categories:
Investor Sentiment Indicator
the near term, investor sentiment has a huge
markets. Investor sentiment largely spans between bullishness and
and shifts in sentiment can cause huge amounts of volatility. The
volatility, the more uncertain investors are as they buy and sell in a
state. While higher volatility suggests more risk, it can also indicate
investors are terribly fearful and are panicking. A huge spike in
may indicate capitulation in the market and could be seen as a
indicator for buying.
Quick Read: [A higher VIX
more fear and confusion, a lower VIX means less fear and uncertainty]
We are looking at the NSE
Volatility index, commonly known as the India VIX index. This measures
implied volatility of the options on NIFTY 50 stocks over the next 30
When implied volatility is high, the market expects stocks to make huge
movements over the next 30 days, but the index does not indicate the
of such movement.
Other than the level
sentiment, the actual
direction and amount of money flowing to different asset classes is
to track. While it tells us which asset class money has flown to, it
provides the basis for a contrary indicator to invest in neglected
instead of following the “hot money”.
Net Cash Flow
Quick Read: [A higher
(positive) reading indicates more people buying stocks; a lower
reading indicates less people buying stocks (fleeing equity markets)]
fund flows are a good indication
of whether investors are investing their money, or pulling money out of
market. We are interested in looking at the AMFI’s monthly
fund net cash
flow. A positive flow means investors are putting money into equity
funds, while a negative flow indicates a net redemption.
investors have managed
to time the market very poorly. Huge net redemptions have coincided
bottoms while huge net investments are often near market tops. The
may not be about poor market timing, but rather the coincident nature
fund flows and equity market performance: investors pull out money from
funds, resulting in a fall in the underlying equity market.
the amount of net
outflow or inflow can also be seen as a contrarian indicator for
want to go against the flow, and buy when everyone is selling.