In a stock market lingo that is dominated by Price earnings, growth, ROI, Price Book etc, investors tend to overlook a few critical indicators which can give a very distinct picture of the underlying trend of the market. Here are four such indicators that every investor needs to be aware of and monitor closely…
The Advance / Decline (A/D) ration:
This is simply the ratio of the number stocks that are advancing in a particular day to the number of stocks that are declining in a particular day. While it may appear to be a very simple and plain vanilla measure, it can throw up interesting insights about the underlying strength of the market. Here are some key takeaways.
A shift in A/D ratio has normally been a strong lead indicator of the markets. Typically, the A/D ratio clearly shows a shift in favour of declines well before the actual correction in the stock begins. Similarly, the advances show clear uptrend well before an upturn in stocks and markets commences. Secondly, the A/D ratio is a strong indicator of the breadth of the market. It gives an indication of whether the market rally or fall is broad-based and therefore sustainable. Thirdly, sector specific rallies and downtrends can be evaluated on the strength of the A/D ratio to understand whether there is sector level re-rating happening or not.
Delivery volumes as a share of total volumes
This is reported on a daily basis and shows what percentage of the volume in the market is delivery based and what percent is speculative in nature. Typically, market volumes that are squared off during the day are classified as delivery volumes and such delivery volumes can be on the buy side or the sell side. There are a few clear indications that emerge from the Delivery volumes.
Firstly, a sharp increase in delivery volumes is an indication of a build up of institutional interest in a stock, which is positive. Secondly, the trend in delivery volumes shows which way a particular sector is headed. Typically, we see delivery volumes picking up sharply ahead of a strong rally in stocks as the strong hands start accumulating in the market. Lastly, even on days when the index crashes if the delivery volumes are very high, it is a sign of delivery based selling. This is normally a signal of more downsides in the market to come.
Dividend yield ratio
It is the ratio of the dividend paid out to the price of the stock. Normally, this ratio does not get due importance as it only captures the dividend aspect of returns and ignores the capital appreciation aspect. But it is still an important indicator. Firstly, in case of market wide dividend yield, the market overpricing and under-pricing can be more clearly defined using dividend yield. For example a dividend yield below 1 is normally a sign of an overheated market while a dividend yield above 3 is a sign of an under-priced market. These levels are more clearly respected than the levels for P/E and P/BV which tend to be vulnerable to speculative excesses.
Similarly, at a stock specific level the dividend yield underscores the cushion or the margin of safety in case of high dividend yield stocks. For example stocks like Cairn India, NMDC, Vedanta and Coal India offer a margin of safety due to attractive dividend yield in the range of 5-9%.
Market cap to GDP ratio:
This macro level ratio is rarely used but is an extremely useful ratio when comparing the relative attractiveness of one country with another. Take the case of India. The market cap to GDP ratio is at just about 75%. This is far lower than other countries like the US, UK and Japan where the market cap / GDP ratio is well above 100%. In fact, China too was above 1 before the vicious correction set into the equity markets. Normally a ratio of below 80% for a matured market is a classic sign of an underpriced market, especially when high growth advantage still exists.
These four ratios are not used very popularly by analysts and fund managers as they are supposed to have limitations. The fact is that despite limitations, these ratios offer very critical insights into the market. Unlike a lot of other ratios, these ratios rarely mislead and manage to give fairly precise insights into the market. Go ahead, and make the best of these ratios!
Get information on all the main parameters required to analyze market trends at Religare Online.
You can ask us your stock related questions with #AskReligareOnMarkets via our Twitter channel @religareonline