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    Stock Market Metrics

    Guy Conger

    Stock Market Metrics: Playing the Numbers
    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.

    The MONEY® Network