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Look Under the Hood...


It is always a good idea to look under the hood when you want to figure out what is really going on. This applies to markets as well. I personally want to see how are the constituents of major indices doing. For indices that are market-weighted, a few large names ( read NVDA) can take indices higher while most stocks are not joining the rally. Then a strong rotation happens shooting the generals! Below is the chart I use - this plots three major indices SP500, Russel 2000 and Nasdaq 100 with their constituents above their respective 50 Day and 200 Day Moving Averages.




As you see, these measures tell a much better tale of when markets are actually overbought and oversold. As you see here, markets were indeed overbought ( rose coloured line, index constituents over their 50 Day Moving Average) and now we are below the equilibrium.


Lets dig deeper using SPX 500 -




As you see , this measure behaves very differently if we are in a bull phase or bear phase. If the current bull trend is to hold , we should see this measure perhaps dip a bit more with some down days and sell-off but then turn back up from around the red dotted line.


If however, a trend change is in the offing , we are likely to see it not going to overbought scenario ( see rose shaded box ) even if indices march higher for a while before eventually collapsing.


Using such tools are way more effective in understanding what is really happening in the market and is a must for serious traders.


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