There are two things that I can keep doing without feeling sick of them. One of them is observing financial markets, as the name of this blog "Market Observer" suggests. The other one is developing software. The next logical and fun thing to do would be to develop software that helps me observe the financial markets.
I developed the software because what is available out there is not offering what I want exactly. If readers know of similar websites which they think do a better job, please let me know. If the website meets my needs and does a better job, then it does not make sense to devote resources developing something which does not add value.
This post talks about the software I developed to monitor stock markets. I am sharing them free of charge with you.
I am primarily a momentum investor. I seek out the strong stock markets and pick stocks in them. A good indicator of the strength of a stock market is the country's benchmark stock index.
I created a table of global stock indices ranking their performance based on their price momentum. The indices can be sorted according to their performance with respect to key moving averages(21days, 50days, 200days), 52-week high and 52-week low. From there, you can tell which are the stronger markets.
Why do I like these parameters like moving averages, 52-week high and 52-week low to gauge momentum strength?
I like to keep things simple. This is why I like moving averages. They are easy to interpret. When the price is above the moving average, it is strong action. When the price is below the moving average, it is weak action.
How to gauge momentum strength in the short-term to the long-term? This is easy with moving averages. For the short-term, I use a 21-days moving average. For the long-term, I use a 200-days moving average. The longer the timeframe, the higher the number of days used in the moving average.
For the strongest momentum stock, I like to look at how near the price is to the 52-week high. When a stock is near the 52-week high, most investors who bought the stock in the past 52 weeks will feel like a winner. Many would-be investors who did not buy will feel like they have missed out. Resistance at this price point is low because few holders will want to sell. Why would you sell when you feel like a winner? On the other hand, there will be many buyers coming in because of the fear of missing out. Unfortunately, buying high carries the risk of suffering a strong reversal. That is the risk that momentum investors have to tolerate.
For beaten-down stocks, I prefer to buy when they rebound and not when they are on the way down. I look at how much a stock has risen from the 52-week low when buying beaten-down stocks which are showing signs of recovery.
Although I seldom buy on the way down, I think this is a workable strategy but the investor needs to have a strong stomach for huge, temporary losses assuming the investment does work out later. If the investment turns out to be a terrible one, you may end up as one of the big shareholders of a bankrupt company. Know what fits you and choose your method accordingly.
When evaluating a country's stock market, do not neglect the currency. I have observed that countries with persistently high inflation tend to have strong-performing stock indices. Take a look at Argentina and Turkey. The gains from stocks will be negated by a weak currency. Hence, I have included the effects of currency when ranking the performance of country stock indices.
After I am satisfied with the strength of a country's stock index, I will either buy the index ETF or I will start looking at individual stocks in the country. A stock index represents the big blue-chip companies in that country. It is not representative of the broader stock market. The broad stock market can be weak despite having a strong stock index.
To help me gauge the strength of the broad market, I developed this "Stock market internal statistics" table. I will talk more about it in a later blog post.