Stock Market Metrics

There are no infallible guides to stock market
movements. However, that doesn’t stop
investors from using various measurements to
try to divine the current and future direction of a
stock’s price or the equity markets as a whole.
Here are some common methods (or metrics)
for gauging the stock market.
Gauging volatility
The CBOE Volatility Index®, informally referred
to as the VIX® and nicknamed “the fear index,”
measures real-time changes in the prices of a
group of S&P 500 30-day options traded on the
Chicago Board Options Exchange. When
financial markets are stressed, prices of those
options tend to rise as investors try to hedge
any potential negative impact on their portfolios.
The more concerned options traders are about
potential instability, the higher the VIX tends to
go; conversely, when fears subside, the VIX
tends to be lower. How high is high for the VIX?
During the worst of the 2008 financial crisis, it
spiked to 89 at one point. Since then, it has
gradually returned to more normal levels in the
teens and twenties.
Moving averages
A moving average reflects a stock’s average
price or an index’s value over a specified period
of time (for example, the last 50 days). As a
new average for the time period is calculated
each day, the earliest day’s data drops out of
the average. The results are typically depicted
as a line on a chart, which shows the direction
in which that rolling average has been moving.
For example, a stock’s 50-day moving average
(DMA) shows whether the stock’s short-term
price has been moving up or down; a 200 DMA
smooths out shorter-term fluctuations by using
the longer 200-day rolling time period. When a
stock’s price moves above its 50-day or
200-day average–two of the most popular
gauges–technical analysts typically consider it
a bullish signal that the stock or index has
momentum. Conversely, when the price moves
below its moving average, it’s considered a
bearish signal suggesting that any uptrend
could be reversing.
Golden cross/death cross
When the short-term moving average of a stock
or index rises above a longer-term average–for
example, when the 50 DMA moves upward
above its 200 DMA–the situation is referred to
as a “golden cross.” It shows that the stock’s
most recent price action has been increasingly
positive, suggesting that investors have grown
more bullish on the stock. Technical analysts
also look for golden crosses with various stock
indices–the S&P 500 is perhaps the most
popular–to try to gauge the potential future
direction of the equity markets.
The so-called “death cross” is the inverse of a
golden cross. It occurs when the 50 DMA falls
below the 200-day, and is considered a bearish
signal, especially when seen in a broad market
index such as the S&P 500. Such signals may
or may not be valid; there are arguments on
both sides. However, many of the automated
trading systems that are responsible for a large
percentage of all transactions are guided at
least in part by such perceived quantitative
signals. As a result, an index or stock can
experience volatility–either up or down–as it
reaches either of these points.
Fundamental metrics
Other stock market metrics rely on the nuts and
bolts of corporate operations that are reflected
on a company’s balance sheet–so-called
“fundamental data.” Though based on the
operations of individual companies, they also
can be aggregated and averaged to suggest
the state of an overall stock market index
comprised of those stocks. The following
represent some frequently used fundamental
stock metrics.
Earnings per share (EPS): This represents the
total amount earned on behalf of each share of
a company’s common stock (not all of which is
necessarily distributed to stockholders). It is
calculated by dividing the total earnings
available to common stockholders by the
number of shares outstanding.
Price-earnings (P/E) ratio: This represents the
amount investors are willing to pay for each
dollar of a company’s earnings. Calculated by
dividing the share price by the EPS, it can be
used to gauge investor confidence in the
company’s future. A ratio based on projected
earnings for the next 12 months is a forward
P/E; one based on the previous 12 months’
earnings is a trailing P/E. Like EPS, P/E is
considered an indicator of how expensive or
cheap a stock is.
Return on equity (ROE): This is a way to gauge
how efficient a company is, especially when
compared to its peers in the industry. This
percentage compares a company’s net income
(usually for the last four quarters) to the total
amount of shareholders’ equity (typically, the
difference between a company’s total assets
and its total liability).
Debt/equity ratio: Obtained by dividing a
company’s total liability by all shareholder
equity, this percentage suggests the extent to
which the company relies on borrowing to
finance its growth.