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Interpreting Market Indicators
September 15, 2009

We explain market indicators and how to interpret them.

Author : iFAST Research Team

Untitled Document

Given the complexities in the financial market, there are many indicators which investors may look at to derive a feel of the market. We have selected a list of indicators which are easy to track and have implications which investors can easily relate to. We have also tried to look at the historical implications of these indicators on the stock market to gauge each indicator’s relevance.

For the ease of description, we have separated these indicators into 2 different categories:

1. Investor Sentiment Indicator

In the near term, investor sentiment has a huge impact on markets. Investor sentiment largely spans between bullishness and bearishness, and shifts in sentiment can cause huge amounts of volatility. The stronger the volatility, the more uncertain investors are as they buy and sell in a panicked state. While higher volatility suggests more risk, it can also indicate that investors are terribly fearful and are panicking. A huge spike in volatility may indicate capitulation in the market and could be seen as a contrarian indicator for buying.


Indicator Quick Read: [A higher VIX reading means more fear and confusion, a lower VIX means less fear and uncertainty]

We are looking at the NSE NIFTY 50 Volatility index, commonly known as the India VIX index. This measures the implied volatility of the options on NIFTY 50 stocks over the next 30 days. 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 direction of such movement.

2. Liquidity Indicator

Other than the level sentiment, the actual direction and amount of money flowing to different asset classes is interesting to track. While it tells us which asset class money has flown to, it also provides the basis for a contrary indicator to invest in neglected assets, instead of following the “hot money”.

 Indian Equity Fund Net Cash Flow

Indicator Quick Read: [A higher (positive) reading indicates more people buying stocks; a lower (negative) reading indicates less people buying stocks (fleeing equity markets)]

Mutual fund flows are a good indication of whether investors are investing their money, or pulling money out of the market. We are interested in looking at the AMFI’s monthly equity fund net cash flow. A positive flow means investors are putting money into equity mutual funds, while a negative flow indicates a net redemption.

Historically, investors have managed to time the market very poorly. Huge net redemptions have coincided with market bottoms while huge net investments are often near market tops. The issue here may not be about poor market timing, but rather the coincident nature of the fund flows and equity market performance: investors pull out money from equity funds, resulting in a fall in the underlying equity market.

Nevertheless, the amount of net outflow or inflow can also be seen as a contrarian indicator for investors who want to go against the flow, and buy when everyone is selling.


iFAST and/or its content and research team’s licensed representatives may own or have positions in the mutual funds of any of the Asset Management Company mentioned or referred to in the article, and may from time to time add or dispose of, or be materially interested in any such. This article is not to be construed as an offer or solicitation for the subscription, purchase or sale of any mutual fund. No investment decision should be taken without first viewing a mutual fund's offer document/scheme additional information/scheme information document. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Investors should seek for professional investment, tax, and legal advice before making an investment or any other decision. Past performance and any forecast is not necessarily indicative of the future or likely performance of the mutual fund. The value of mutual funds and the income from them may fall as well as rise. Opinions expressed herein are subject to change without notice. Please read our disclaimer in the website.


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