If you're not looking closely, you've probably missed it. But in each day's Big Picture column, an extra page with stock market indicators is tucked at the bottom of the article.
The General Market Indicators page primarily shows the price and volume charts of the Nasdaq composite, S&P 500 and Dow Jones Industrial Average. But it also includes three indicators that provide a look at the market's internals.
First, advance-decline lines are plotted on the Nasdaq composite and NYSE charts. Both lines help to gauge market breadth.
Generally, you want to see these lines climb as the main stock market indexes are advancing, indicating broad participation in the uptrend, rather than a few megacap stocks or sectors driving gains.
Beware Of Diverging Breadth
A divergence between an index and the advance-decline line can signal major impending change. For example, the Nasdaq's A-D line started to flag in the latter part of 2021, even as the index continued to act strongly.
The divergence proved to be a warning sign of the 2022 bear market. Similarly bearish divergences occurred in 2000 and 2007, ahead of two major bear markets.
How Put-Call Ratios Works In The Stock Market
Second, the put-call volume ratio takes option trading data to measure investor sentiment. This is a contrarian indicator that uses the historical tendency of investors to be most fearful at market bottoms.
Those extreme levels of fear show up when more bearish put options get bought than bullish call options. Normally, call buying is stronger than put buying, so when puts exceed calls, you know the stock market is nervous.
In the General Market Indicators page, you'll find the put-call volume ratio below the Nasdaq chart.
Specifically, look for a move in the ratio above 1.15. That level — marked with a dashed line — has often signaled index lows. Alternatively, ratios below 0.5 can point to extreme complacency and possible market tops.
This indicator, however, hasn't worked so well during this year's bear market.
The put-call indicator is also featured on IBD's Psychological Market Indicators page. MarketSmith users can find it under the symbols GMIAB (for Nasdaq) and GMIAA (for NYSE).
Index Accumulation/Distribution Ratings
A third stock market indicator to watch: the Accumulation/Distribution Ratings of the major indexes. Those are printed at the top left of each index chart.
As with individual stocks, the ratings measure aggregate buying and selling activity. A and B ratings are best, while C grades are OK. On the flip side, D and E ratings indicate more aggressive selling pressure on balance.
You can also use this rating to evaluate the quality of a market uptrend. In some rare cases, the rating can start to improve before the indexes start to rally. Conversely, the rating can weaken before the market rolls over.
For example, the S&P 500 held a D- rating in the first week of January 2022, while the Dow sported a slightly higher D+ rating, even though both indexes still traded near highs ahead of a bear market.
Currently, the index A/D ratings are at E and D.
This article was originally published Dec. 9, 2022, and has been updated.
