Here you can get practice reading the market mood for yourself. (If you want to see Toni and Gordon’s current read of the market, go here.)
Reading the market mood is quite simple once you get used to the charts. The two important conditions you must observe are as follows:
1) The comparison between the S&P 500 index and the Dow Jones Utility Stock index.
For this condition you are trying to answer this question: which group of stocks to investors appear to prefer more right now, utility stocks or regular stocks? You must compare the difference between these two indexes over the last two months on a chart that shows a year of data or more. The two possibilities are that either utility stocks are doing better or that the S&P 500 is doing better.
2) The general trend of market volatility.
This condition tracks whether market prices are changing with a greater degree of fluctuation. To determine this you will track the Average True Range (ATR). You must observe the general slope of the ATR and try to determine its trend over the most recent two months. The two possibilities are that the ATR is rising or falling.
Once you have identified these two conditions, then you can use the combination of them to tell you whether the market is giving a GO or a STOP sign.
Condition 1: The S&P 500 index is outperforming the Dow Jones Utilities Index over the past two months
Condition 2: The ATR is falling over the last two months.
Condition 1: The Dow Jones Utilities index is outperforming the S&P 500 Index over the past two months
Condition 2: The ATR is rising over the last two months.
Now for some practice. Below are four sets of charts. See if you can determine whether each chart is showing a STOP sign or a GO sign.