CU-BCOM-SEM-IV-Fundamental and Technical Analysis in Stock Market-Second Draft

This index is calculated by taking all the stocks in the market that have had an uptick minus all the stocks that had a down tick and then the result is displayed on a chart based on a particular time frame. It is an intraday indicator as it is using data on a tick basis but is useful for finding inefficiencies in the market. One should note that the breadth indicators can only be calculated on indexes and not on a particular stock. Depending on the data available these indicators can be calculated to analyse the market strength of the stock market. Traders should use market breadth indicators with other forms of technical analysis tools, such as chart patterns and technical indicators, to maximize the odds of success. 14.2 BREADTH INDICATORS Market breadth is a critical form of analysis that every practitioner should be familiar with for reliable forecasting of potential market action. It is the study of the behaviour of the universe of stocks that populate the markets. It concentrates on the wider market action in contrast to the narrow focus and application of technical analysis on single stocks alone. Technical analysis on single stocks without regard to the overall market action or environment is not a particularly effective approach to reliable forecasting. In this chapter, we shall cover various market-breadth operators, associated indicators, and their technical interpretation 14.2.1 AD Line The Advance-Decline Line (AD Line) is a breadth indicator based on Net Advances, which is the number of advancing stocks less the number of declining stocks. Net Advances is positive when advances exceed declines and negative when declines exceed advances. The AD Line is a cumulative measure of Net Advances, rising when it is positive and falling when it is negative. Chartists can use Net Advances to plot the AD Line for the index and compare it to the performance of the actual index. The AD Line should confirm an advance or a decline with similar movements. Bullish or bearish divergences in the AD Line signal a change in participation that could foreshadow a reversal. 201 CU IDOL SELF LEARNING MATERIAL (SLM)

Figure 14.1: AD Line The actual value of the AD Line depends on the starting point for the calculation. Since it must start somewhere, the first calculation for the AD Line is simply Net Advances for one period. Subsequent values are calculated using the AD Line value for the previous period's value plus Net Advances for the current period. The example above shows the AD Line calculation for 25 days beginning on April 15, 2010. The first value is simply Net Advances for that day (-93). The second value is lower because Net Advances for April 16th was negative (-1899). The AD Line moved lower until Net Advances turned positive on April 20th (+1934). Even though the actual value of the AD Line would be different if it began in January 2009, the shape of the line for this calculation period would be the same. It simply rises and falls as Net Advances rises and falls. The shape and direction of the AD Line are important, not the actual value. 202 CU IDOL SELF LEARNING MATERIAL (SLM)

Figure 14.2: AD Line Chart Interpretation The AD Line measures the degree of participation in an advance or a decline. An AD Line that rises and records new highs along with the underlying index shows strong participation that is bullish. An AD Line that fails to keep pace with the underlying index and confirm new highs shows narrowing participation. Market strength is undermined when fewer stocks participate in an advance. Narrowing participation is often identified with a bearish divergence between the AD Line and the underlying index. On the downside, the market is considered weak when the AD Line moves to new lows along with the underlying index. This reflects broad participation in the decline. A bullish divergence forms when the AD Line fails to record a lower low along with the index. This means fewer stocks are declining and the decline in the index may be nearing an end. Bullish Divergence Chart 1 shows a bullish divergence in the NYSE AD Line. Because the NYSE AD Line is based on the advance-decline statistics from the NYSE, it makes sense to compare its performance to the NYSE Composite. A bullish divergence formed in June-July 2009 when 203 CU IDOL SELF LEARNING MATERIAL (SLM)

the NYSE Composite moved below its June low, and the NYSE AD Line formed a higher low. Even though this bullish divergence is rather small and only encompasses a few weeks of trading, it foreshadowed an important low in July 2009. The NYSE Composite advanced over 10% from its July low to its August high. Larger bullish divergences can be found from October 2002 to March 2003 and from May 2004 to August 2004. These divergences foreshadowed important lows in the stock market. Figure 14.3: Bullish Divergence Chart Bearish Divergence Chart 2 shows two bearish divergences in the NYSE AD Line from June to November 2007. The NYSE Composite moved to new highs in July, but the AD Line peaked at the beginning of June. The lower high in the AD Line in July 2007 set up the first bearish divergence because breadth did not confirm the index. 204 CU IDOL SELF LEARNING MATERIAL (SLM)

Figure 14.4: Bearish Divergence Chart The NYSE Composite surged again to new highs in October, but the AD Line fell well short of its July high and formed another bearish divergence in October. There are two bearish divergences at work here. First, the AD Line did not exceed its summer highs. Second, the AD Line formed a lower high from early October to late October. With the NYSE Composite forges higher highs during these timeframes, bearish divergences took shape because breadth did not confirm. This string of bearish divergences foreshadowed the January support break and the bear market of 2008. Quirks The advance-decline statistics have a few quirks that chartists should understand. First, the Nasdaq AD Line can fall for extended periods, even if the Nasdaq itself is rising. This is because Nasdaq listing requirements are not as strict as NYSE listing requirements. The Nasdaq is full of upstarts in industries ranging from biotech to technology to alternative energy. There may be huge upside potential, but there is also a risk of absolute failure. This means more Nasdaq stocks are prone to delisting. Companies that fail are removed from the index and replaced, but their negative effect on the AD Line remains. Chart 4 shows the Nasdaq AD Line declining even as the Nasdaq advanced from 2010 until 2012. The AD Line 205 CU IDOL SELF LEARNING MATERIAL (SLM)

turned up and advanced along with the Nasdaq in 2013 but turned down in 2014 and did not follow the Nasdaq higher. Figure 14.5: Quirks Chart Second, the advance-decline statistics favour small-cap and mid-cap stocks over large-cap stocks. Thousands of stocks trade on the Nasdaq and NYSE every day and most of these stocks are small- and mid-cap. Relatively few are large-caps. Regardless of market cap or volume, an advance count as +1 and a decline counts as -1. This means that an advance in ExxonMobil, with a market capitalization in excess of $200 billion and average daily volume in excess of 20 million shares, counts the same as an advance in TECO Energy, which has a market capitalization less than $5 billion and average daily volume around 2 million shares. The AD Line is the great equalizer. The AD Line is a breadth indicator that reflects participation. A broad-based advance shows underlying strength that lifts most boats. This is bullish. A narrow advance shows a relatively mixed market that is selective. Narrowness participation in an advance (or decline) sets up the divergence signals. An advance with narrow participation is unlikely to keep up with the underlying index and a bearish divergence will form. Similarly, a decline with few stocks participating is unlikely to keep up with the index and a bullish divergence will form. These divergences can help chartists identify potential reversals in the underlying index. 14.2.2 Highs and Lows 206 CU IDOL SELF LEARNING MATERIAL (SLM)

The High-Low Index is a breadth indicator based on Record High Percent, which is based on new 52-week highs and new 52-week lows. The Record High Percent equals new highs divided by new highs plus new lows. The High-Low Index is simply a 10-day SMA of the Record High Percent, which makes it a smoothed version of the Record High Percent. This article will explain how to identify the direction of the High-Low Index and how to use the absolute level to define a trading bias. Table 14.1:High and low Index Chart The table above shows some possibilities for Record High Percent. As the formula implies, Record High Percent shows the number of new highs relative to the total (new highs plus new lows). The total is multiplied by 100 to generate round numbers that fluctuate between 0 and 100. The table above shows various possibilities based on an index with 100 stocks, such as the Nasdaq 100 or S&P 100. Rarely, if ever, will 100% of stocks record a new high or new low. Readings below 50 indicate that there were more new lows than new highs. Readings above 50 indicate that there were more new highs than new lows. 0 indicates there were zero new highs (0% new highs). 100 indicates that there was at least 1 new high and no new lows (100% new highs). 50 indicates that new highs and new lows were equal (50% new highs). 207 CU IDOL SELF LEARNING MATERIAL (SLM)

Figure 14.6:High and low Index Graph Chart The High-Low Index smooths Record High Percent with a 10-day SMA. Chart 1 above shows the Record High Percent in the first indicator window (black line) and the High-Low Index in the second indicator window (red line). Notice how the S&P 100 Record High Percent ($OEXHILO) smooths the S&P 100 Record High Percent ($RHOEX), especially during May-June 2010 (yellow area). Record High Percent bounced from 0 to 100 numerous times, but the High-Low Index trended lower in May and higher in June. Interpretation In general, a stock index is deemed strong (bullish) when the High-Low Index is above 50, which means new highs outnumber new lows. Conversely, a stock index is deemed weak (bearish) when the High-Low Index is below 50, which means new lows outnumber new highs. This indicator can move to its extremities and remain near its extremes when the 208 CU IDOL SELF LEARNING MATERIAL (SLM)

underlying index is in a strong uptrend or downtrend. Readings consistently above 70 usually coincide with a strong uptrend. Readings consistently below 30 usually coincide with a strong downtrend. Direction Identification The directional movement of The High-Low Index shows when new highs are expanding or contracting, which in turns reflects underlying strength or weakness in the index. Chartists can define direction by applying a moving average to the High-Low Index. Chart 2 shows the NY Composite with the NYSE High-Low Index ($NYHILO) and its 20-day SMA. The High- Low Index turns up when it moves above the 20-day SMA and turns down when it moves below the 20-day SMA. New highs are increasing and/or new lows are decreasing when the High-Low Index rises. New highs are decreasing and/or new lows are increasing when the High-Low Index falls. Figure 14.7:High and low Index Graph Chart The green dotted lines show the High-Low Index turning up and moving above its 20-day SMA, which is positive for the NY Composite. The red dotted lines show the High-Low Index moving below its 20-day SMA, which is negative for the NY Composite. Because the 209 CU IDOL SELF LEARNING MATERIAL (SLM)

bigger trend was down from October 2007 to March 2009, the bearish signals worked much better than the bullish signals. Bull-Bear Bias The absolute level of the High-Low Index can also be used to ascertain strength or weakness in new highs, which in turn reflects underlying strength or weakness in the index. Sometimes the High-Low Index can be rather volatile but remain consistently above or below its midpoint (50). Remember, new highs outnumber new lows when above 50 and new lows outnumber new highs when below 50. This level provides a clear bullish or bearish bias for the underlying index. Figure 14.8: Bull-Bear Bias Graph Chart Chart 3 shows the Nasdaq with the High-Low Index and its 20-day SMA. The index moved above/below its 20-day SMA many times from June to August 2007 and from November 2007 to February 2008. Playing these crossovers would have resulted in numerous whipsaws. Instead, chartists can look at the overall level of the High-Low Index. Notice how the High- Low Index moved below 50 at the end of May and remained below 50 until late August (3 210 CU IDOL SELF LEARNING MATERIAL (SLM)

months). Once moving above 50, the High-Low Index remained above 50 until early March (7 months). Not all signals will last this long, however. Armed with a bullish or bearish bias, chartists can then turn to other aspects of technical analysis to generate corresponding signals. Chartists can focus on bullish signals when the High-Low Index is above 50 and ignore bearish signals. Oversold readings, resistance breakouts or bullish moving average crosses can be used in a bullish environment. Chartists can focus on bearish signals when the High-Low Index trades below 50 and ignore bullish signals. Overbought readings, support breaks, and bearish moving average crosses can be used in a bearish environment. A Lagging Indicator New 52-week highs and new 52-week lows are considered lagging indicators. In other words, the market will change direction before there is a significant shift in the number of new 52- week highs or the number of new 52-week lows. Think about it. It takes at least 52 weeks to forge a new high or a new low. Therefore, an extended move is required for a stock to forge a new high or a new low. There are plenty of new highs after an extended advance, just as there are plenty of new lows after an extended decline. New highs dry up when a stock index corrects after an extended advance. Some new lows will surface during a correction, but it takes an extended decline to generate a serious increase in new lows. Similarly, new lows dry up when a stock index bounces after an extended decline. Some new highs may surface during this bounce, but it takes an extended advance to generate a serious increase in new highs. As with its cousin, the Record High Percent, the High-Low Index is a breadth indicator specific to an underlying index. The Nasdaq 100 High-Low Index applies to stocks in the Nasdaq 100, the NYSE High-Low Index applies to stocks in the NY Composite and so on. Like all indicators, the High-Low Index is not meant to be used as a stand-alone indicator. It should be used in conjunction with other aspects of technical analysis. 14.3 VOLUME SENTIMENT INDICATORS 14.3.1 Short Interest Ratio When traders talk about the “short interest ratio,” they often don’t agree on the definition. This is because there is more than one definition for the term and more than one way that the ratio can be calculated. The short interest ratio could be the same as the days to cover, the short interest as a percentage of float, or the NYSE short interest ratio. What Does the Short Interest Ratio Imply? The short interest ratio is a mathematical indicator in finance. It depends on two factors – short interest and average daily trading volume. It ultimately indicates whether it is the right time to short sell. 211 CU IDOL SELF LEARNING MATERIAL (SLM)

When the ADTV is high, the short interest ratio is low. When the ADTV is low, the short interest ratio is high. Similarly, when the total short interest is high, the ratio is high, and when the total short interest is low, the ratio is low. It indicates how high or how low the shorted shares are compared to the average daily trading volume. When the short interest ratio is high, the number of shares that will be repurchased in the open market after short selling is high. Similarly, if the short interest ratio is low, it means that the number of shares that will be repurchased in the open market after short selling is low. Regardless of which definition is used, the basic principle is the same: a stock or index with a high short interest ratio has a high number of shares sold short and/or a low number available to trade. This means that if a sudden buying frenzy were to occur, short-sellers would have to frantically cover their positions. Now let’s delve deeper into each of these definitions. Short interest ratio as days to cover One definition of the short-interest ratio is the number of days to cover. This is the number of shares sold short divided by the average daily trading volume. For example, if 1000 shares of XYZ corporation have been sold short and an average of 100 XYZ shares are traded each day, then the days to cover ratio is 1000 ÷ 100 = 10. This means that if all the shorts wanted to cover their positions at the same time, it would take around ten days for them to do so. A high day to cover means that short-sellers would take a long time to unwind their positions if the price were to suddenly rise. Low days to cover means that short-sellers could easily and quickly cover their positions even if the price were to suddenly rise. Short interest ratio as a percentage of float Another way of defining the short-interest ratio is as a percentage of float. In this case, we calculate the ratio by dividing the number of shares sold short by the total number of shares available for trading (the public float). For example, let’s say that there are 10,000 shares of XYZ corporation, but 200 of these shares are held by company officers and are “locked-in” (can’t be sold). In this case, the public float is 9,800 shares. And let’s say that there are 100 shares sold short. We calculate the short-interest ratio by dividing the 100 shares sold short by the 9,800 of the public floats. This gives us a short interest ratio of approx. 0.01 or 1%. Short interest as a percentage of float above 50% means that short-sellers would have a very difficult time covering their positions if the price were to rise. This is because most shares have been sold short already. As a result, short-sellers would have to compete to buy the shares back if they wished to cover. 212 CU IDOL SELF LEARNING MATERIAL (SLM)

Another definition of the short-interest ratio is the NYSE short interest ratio. Unlike the other versions of the ratio, this one refers to the entire U.S. stock market instead of just one stock. The NYSE short-interest ratio is calculated by taking the number of shares sold short on the entire NYSE and dividing it by the daily volume on the NYSE for the previous 30 days. For example, suppose that there are 15 billion shares sold short on the NYSE, and 2 billion shares on average were traded each day over the past 30 days. This gives us an NYSE short interest ratio of 15 billion ÷ 2 billion = 7.5. This means that it would take an average of 7.5 days to cover the entire short position on the NYSE. A high NYSE short interest ratio means that the stock market is vulnerable to a “short- squeeze.” It could rise quickly if new economic data, political news, or other types of information are released that make investors more optimistic. What is considered a high short interest ratio? The concept of a high short interest ratio is a little ambiguous. Investors will often disagree as to just how high should be considered “high.” However, there are some rules of thumb that any experienced options trader would agree with. Here are a few of them:  A day to cover of between 1 and 4 usually indicates strong positive sentiment and a lack of interest from short-sellers.  A day to cover above 10 indicates extreme pessimism.  Short interest as a percentage of float below 10% indicates strong positive sentiment  Short interest as a percentage of float above 10% is high, indicating the significant pessimistic sentiment.  Short interest as a percentage of float above 20% is extremely high. The NYSE short interest ratio has been gradually falling since the late 1990s. So, no long- term level can be identified as “high.” But over the short-run, a spike upwards can indicate pessimistic sentiment towards the economy as a whole. How to trade using a high short interest ratio? Now that we’ve explained what is considered a high short interest ratio, let’s consider how to trade using this information. As with all metrics we can use to evaluate stocks, a high short interest ratio is subject to interpretation. If a stock has many short-sellers, it may be because the company is not very profitable. Maybe the company is facing market changes that have made its business model untenable, or perhaps the management is involved in accounting scandals. On the other hand, a high short interest ratio may also be interpreted as a contrarian signal that the stock is a bargain. For example, let’s say that the company is developing a new 213 CU IDOL SELF LEARNING MATERIAL (SLM)

product, but early reports suggest the product may be unsafe. As a result of this early report, short-sellers have piled in, pushing the short interest as a percentage of float above 10%. If later, the product is proven to be safe, there may be a sudden flood of buyers. But because short interest is so high, many short-sellers may be forced to cover their positions. This can quickly push the stock price even higher, causing a strong rally. Because of this potential for sudden rallies in stocks that have high short interest ratios, many seasoned options traders consider the metric to be a bullish indicator. High short interest ratio synopsis  There are several different definitions for what the short-interest ratio is. It could mean the number of shares shorted for an individual stock as compared to the daily volume, the number of shares shorted for an individual stock as compared to the total public float, or the number of shares shorted on the entire NYSE compared to the daily volume of the entire exchange.  Regardless, most options traders would agree that if a short-interest ratio is defined as the number of days to cover, more than 10 days is high. Likewise, short interest as a percentage of float above 10% is high and above 20% is extremely high.  These high ratios may indicate that a company is in trouble. If so, you may want to join the crowd and go short. Or if you think there is no good reason for this company to have a high short interest ratio, you may want to go long to take advantage of the coming short squeeze.  Register here to attend live free option trading webinars with our founder and veteran trader Larry Gaines.  The short interest ratio is a mathematical indicator of the average number of days it takes for short sellers to repurchase borrowed securities in the open market.  The ratio is calculated by dividing the total number of shorted shares of a stock by the average daily trading volume.  When the short interest ratio is high, the number of shares that will be repurchased in the open market after short selling is high, and similarly, if the short interest ratio is low, it means that the number of shares that will be repurchased in the open market after short selling is low. 14.3.2 Mutual Fund Liquidity A mutual fund liquidity ratio is a ratio that compares the amount of cash in a fund relative to its total assets. Mutual fund liquidity ratios can vary and may include cash or cash equivalents. Liquid mutual funds are one of debt funds. It requires a clear understanding of your investment horizon since they are categorized based on duration. From overnight funds 214 CU IDOL SELF LEARNING MATERIAL (SLM)

to long-duration funds of 7 years, debt funds have been classified into 16 different categories. This move by SEBI is to help investors find the right type of fund without being overwhelmed by the choices. Here, we are going to explore Liquid Mutual Funds and talk about everything that you need to know about them before investing. What is Liquid Mutual Fund? A Liquid Mutual Fund is a debt fund which invests in fixed-income instruments like commercial paper, government securities, treasury bills, etc. with a maturity of up to 91 days. The net asset value or NAV of a liquid fund is calculated for 365 days. Further, investors can get their withdrawals processed within 24 hours. These funds carry the lowest interest-rate risk in the debt funds category.  A mutual fund liquidity ratio is a ratio that compares the amount of cash in a mutual fund relative to its total assets.  Depending on how a mutual fund ratio is calculated by a specific fund, the cash levels can include just cash or also cash equivalents.  Mutual funds need to find the right balance of cash levels; too much cash means money is not being invested, losing out on returns, while too little cash means a fund is not liquid enough to meet expenses and unexpected cash needs.  Most funds keep approximately 3% to 5% of their total assets in cash.  Investors may follow mutual fund industry liquidity ratios to get a sense of money managers’ collective perspective on the market. Liquidity ratios greater than 5% indicate a bearish outlook while ratios below 5% indicate a bullish outlook.  In December 2018, the Securities and Exchange Commission (SEC) began issuing new rules related to mutual fund liquidity management and monitoring funds' adherence to these rules. Understanding a Mutual Fund Liquidity Ratio A mutual fund liquidity ratio is reported by mutual funds to provide investors with insight into how much cash the fund is holding. Companies may report cash ratios or cash and cash equivalent ratios, which is a broader measure encompassing cash equivalents that can be easily liquidated within a short period of time. The ratio is a simple percentage dividing either the total cash or the total cash and cash equivalents by the fund’s total assets. Mutual fund cash levels are also followed closely by industry speculators as an indication of the market’s direction. Most funds keep approximately 3% to 5% of their total assets in cash. Finding the right cash balance is important for a mutual fund and its investors. Having too much cash on hand, meaning cash that is not invested, is not a useful deployment of investment capital as it defeats the purpose of investing. Investors provide their cash to 215 CU IDOL SELF LEARNING MATERIAL (SLM)

mutual funds so that they can be invested and generate a return, most often through capital appreciation, rather than having it sit idly. Having some levels of cash is important as it allows for liquidity. Investments can take time to unwind, therefore, doing so to meet cash requirements can be risky if the investments are currently at a loss. Therefore, having cash on hand to meet unexpected cash needs or to pay for operating expenses is a prudent measure. Industry Speculation The Investment Company Institute provides a monthly report on mutual fund industry statistics, which includes information on the mutual fund industry’s average mutual fund liquidity ratio. In May 2021, the Investment Company Institute reported a liquidity ratio across equity mutual funds of 2.1%.1 Generally, investors may follow mutual fund industry liquidity to get a sense of money managers’ collective perspective on the market. Liquidity ratios greater than 5% are expected to show some fear in the market’s prospects for gains with a bearish outlook. Liquidity ratios below 5% tend to show that money managers are more bullish on the markets and fully deploying all cash. Mutual Fund Cash Regulations Until 2016, mutual fund cash levels and mutual fund liquidity were not factors that were highly regulated. However, in 2016 the Securities and Exchange Commission (SEC) issued some new rules pertaining to mutual fund liquidity management. The agency’s new rules went into effect in December 2018, adding some new provisions to the Investment Company Act of 1940. Changes are primarily focused on Rule 22e-4, which requires funds to document a comprehensive liquidity program and invest no more than 15% of their net assets in illiquid investments. Other changes include amendments to mutual fund registration Form N-1A as well as changes to Form N-LIQUID, Form N-CEN, and Form N-PORT.3 With the new rules, the SEC is seeking to help investors more easily buy and redeem shares while also instituting some new parameters for liquidity risk management and cash position reporting. How do Liquid Mutual Funds work? The core objective of a liquid fund is providing capital protection and liquidity to the investors. Therefore, the fund manager selects high-quality debt securities and invests according to the scheme’s mandate. Further, he ensures that the average maturity of the portfolio is not more than 91 days. Shorter maturity makes the fund less prone to change in interest rates. By matching the maturity of individual securities with the maturity of the portfolio, the fund manager tries to deliver better returns. Liquid funds are known to offer better returns than a regular savings account. 216 CU IDOL SELF LEARNING MATERIAL (SLM)

Should you invest in Liquid Mutual Funds? If you have a good amount of cash which is not invested anywhere and are looking for a short-duration investment option with lower risks, then liquid funds are ideal for you. Your money can earn better returns than merely lying in a savings account along with the same liquidity. Many investors use liquid funds as a stepping stone to investing in equity funds. They start with investing in a liquid fund and then initiate a systematic transfer plan to an equity fund. This helps them invest in equity funds in a phased manner and benefit from Rupee Cost Averaging. Risks Since the underlying assets of a liquid fund have a maturity of up to 91 days, they do not experience a lot of volatility. Hence, the NAV of the fund remains almost steady. This makes liquid funds low-risk investments. However, it is important to note that if the credit rating of any underlying security drops, then the NAV can experience a drop too. Liquid funds are NOT risk-free. Returns A quick look at the performance of liquid funds will tell you that these funds offer around 7- 9% returns on an average. Hence, they are better than the 4% returns earned on savings account deposits. Expense Ratio Like all other mutual fund schemes, liquid funds also charge an annual fee for offering fund management services. This is called expense ratio – a percentage of the total assets of the fund. Funds with a lower expense ratio are preferred by most debt investors as it helps in maximizing their gains. Further, most fund managers of liquid funds invest and hold the security until maturity. Therefore, the fund does not incur expenses due to excessive buying and selling of securities keeping the expense ratio low. Investment Plan Liquid funds are used by many investors to create an emergency fund. They offer reasonable returns at lower risks and are as liquid as savings account deposits. These funds are designed for investors with a 3-month investment horizon. Hence, before investing in these funds, ensure that you create an investment plan accordingly. Why Mutual Fund Liquidity is Important? Let us discuss more about the significance of mutual fund liquidity. Liquidity in mutual funds can be beneficial to investors in many ways. If you have sufficient funds for the short term, you should invest in liquid funds. So that if there are any urgent cash requirements in the future you can use liquid funds with short term investment plans and enjoy great returns. Liquid funds provide cushion to stay afloat during times when you want to sell all your assets 217 CU IDOL SELF LEARNING MATERIAL (SLM)

quickly. Illiquid funds are good but unavailing in situations when you are compelled to sell all of them. The significance of liquid funds is that you can access them easily and use it when you experience financial bumps. It is pointless to invest in funds that cannot be accessed easily when you need them the most in case of emergencies. If you find yourself in uninvited financial situations liquid funds will act as your back up plan to ease the debt burden. You can convert your liquid assets to cash also knows as liquid money while retaining its market value. Let us understand what is liquid money? Irrespective of the revenue generated by a company it should have the capability to convert the assets into cash. This cash generated from your liquid assets is called liquid money which can help you to weather financial liabilities with short notice. Mutual Fund Liquidity can be beneficial to investors in many ways. We have listed down a few of the following benefits of mutual fund liquidity: Easy Switching Between Funds If you find that due to some reason your funds are not profitable anymore you can use the option of liquidity in a mutual fund to earn some returns and then switch to more profitable fund. Market Volatility If the equity market becomes volatile during an unprecedented crisis like the recent COVID- 19 pandemic. During such crisis liquid funds offers flexibility to withdraw money without any exit loads. To get these benefits you are required to invest in a highly-liquid emergency fund. Underperformed Funds The time between when you start investing and the time your fund becomes fruitful is huge. At different economic events during this time span, you can review their relevancy based on liquidity in a mutual fund. You can analyse your funds and make alterations accordingly to keep your portfolio intact. STP and SWP In case of future long-term goals like your retirement planning, you can make a proper exit at the appropriate time without hampering your profits. For this, your mutual funds offer a Systematic Transfer Plan (STP) and Systematic Withdrawal Plan (SWP). Using STP you can switch from high-risk funds to low-risk funds as your goals are due. SWP offers you to redeem your fund in a systematic way to avoid any bump to the profits. Higher Returns 218 CU IDOL SELF LEARNING MATERIAL (SLM)

Instead of keeping your money idle in a savings account, one should always go for liquid funds. These schemes assure higher returns than a savings bank account that too within a shorter time. Low Risk The liquid funds are accompanied by a lower level of risks as they are invested in markets with the highest maturity of 91 days. 14.3.3 Put Call Ratio The Put/Call Ratio is an indicator that shows put volume relative to call volume. Put options are used to hedge against market weakness or bet on a decline. Call options are used to hedge against market strength or bet on advance. The Put/Call Ratio is above 1 when put volume exceeds call volume and below 1 when call volume exceeds put volume. Typically, this indicator is used to gauge market sentiment. Sentiment is deemed excessively bearish when the Put/Call Ratio is trading at relatively high levels, and excessively bullish when at relatively low levels. Chartist can apply moving averages and other indicators to smooth the data and derive signals. In other words, Put-call ratio (PCR) is an indicator commonly used to determine the mood of the options market. Being a contrarian indicator, the ratio looks at options build-up, helps traders understand whether a recent fall or rise in the market is excessive and if the time has come to take a contrarian call. The ratio is calculated either based on options trading volumes or based on options contracts on a given day or period. One way to calculate PCR is by dividing the number of open interests in a Put contract by the number of open interests in Call option at the same strike price and expiry date on any given day. Calculation The calculation is straightforward and simple. Put/Call Ratio = Put Volume / Call Volume Interpretation As with most sentiment indicators, the Put/Call Ratio is used as a contrarian indicator to gauge bullish and bearish extremes. Contrarians turn bearish when too many traders are bullish. Contrarians turn bullish when too many traders are bearish. Traders buy puts to insurance against a market decline or as a directional bet. While calls are not used so much for insurance purposes, they are bought as a directional bet on rising prices. Put volume increases when the expectations for a decline increase. Conversely, call volume increases when the expectations for an advance increase. Sentiment reaches extremes when the Put/Call Ratio moves to relatively high or low levels. These extremes are not fixed and can change over time. A Put/Call Ratio at its lower extremities would show excessive bullishness 219 CU IDOL SELF LEARNING MATERIAL (SLM)

because call volume would be significantly higher than put volume. In contrarian terms, excessive bullishness would argue for caution and the possibility of a stock market decline. A Put/Call Ratio at its upper extremities would show excessive bearishness because put volume would be significantly higher than call volume. Excessive bearishness would argue for optimism and the possibility of a bullish reversal. What is a Good Put/Call Ratio? The put/call ratio isn’t fixed and changes with the change in market moods. However, market observer’s ratio value of 0.7 as a compass. Put/call ratio greater than 0.7 or exceeding one, suggests a bearish trend is building in the market. Similarly, when the put/call ratio value declines below 0.7, and falling close to 0.5, means traders are buying more calls than put, an indication of an emerging bullish trend. The put/call ratio reflects how the market perceives the recent events of earning.While studying the put/call ratio, it is important to observe the value of both the numerator (put) and the denominator (call). Fewer exchanges of call options would push the value of the put/call ratio higher without any significant change in the volume of put options, which can give a false impression of market sentiment. How is it Arrived at? The Put-Call Ratio brings out how many Put OPTION contracts got traded for every Call contract that was traded on any given trading day on a particular index or stock. The Put-Call Ratio is simply the number of Put trades divided by the number of Call trades. For instance, on May 14, 2015, a total of 74.24 lakh Index options contracts got traded on the NSE. This was made up of 34.11 lakh Index Put trades and 40.13 lakh Index Call trades. On that day, therefore, the Put-Call Ratio was 0.85. For every 100 Index Call contracts traded on that day there were 85 Index Put contracts which got traded. What is it Used for? Traders and investors track the Put-Call Ratio to get a rough sense of the upcoming trend in the underlying stock or index. A Put-Call Ratio of above One simply means more Puts getting traded than Calls. Puts generally imply a bearish outlook and so when they are getting traded more than Call contracts a general impression of bearishness overwhelming bullishness is created. Thus, if an index or a stock is consistently seeing a Put-Call Ratio of more than One it would broadly imply a bearish trend. Why Puts are Bearish, and Calls are Bullish? 220 CU IDOL SELF LEARNING MATERIAL (SLM)

Buyer of a Put contract gets the right, but not the obligation, to sell an index or stock while the Seller is obliged to buy the index or stock if the Buyer exercises his right. Therefore, when an investor or trader expects the price of an index or stock to fall, he would buy a Put contract. The opposite is true for Call contracts. Buyer of a Call contract gets the right, but not the obligation, to buy an index or stock while the Seller is obliged to sell the index or stock if the Buyer exercises his right. Therefore, when an investor or trader expects the price of an index or stock to rise, he would buy a Call contract. Why that may not Always be so? Puts can also be bought by investors who are bullish but who are performing complex trading strategies simultaneously involving cash market positions and trades in futures and options. Similar, Call Buyers could be bearish investors deploying complex trading strategies. Thus, it may not always be case that a Put-Call Ratio of more than One points to bears overwhelming bulls. Conversely, a Put-Call Ratio of less than One will not always denote bulls overwhelming bears. 14.3.4 TRIN The Arms Index, also called the Short-Term Trading Index (TRIN) is a technical analysis indicator that compares the number of advancing and declining stocks (AD Ratio) to advancing and declining volume (AD volume). It is used to gauge overall market sentiment. Richard W. Arms, Jr. invented it in 1967, and it measures the relationship between market supply and demand. It serves as a predictor of future price movements in the market, primarily on an intraday basis. It does this by generating overbought and oversold levels, which indicate when the index (and most stocks in it) will change direction. What is the Arms Index? The Arms Index, also known as the Short-Term Trading Index (TRIN), refers to a short-term technical analysis trading indicator that compares the number of advancing and declining stocks issues with the advancing and declining volume. 221 CU IDOL SELF LEARNING MATERIAL (SLM)

Figure 14.9: Arms Index (TRIN) Chart Arms Index Formula Developed by Richard W. Arms Jr. in 1967, the Arms Index is calculated by dividing the advancing/declining ratio (AD ratio) by the advancing/declining volume (AD volume). The value 1 is especially important here, as crossing it indicates whether the market is strong or weak. Arms Index - Formula 222 CU IDOL SELF LEARNING MATERIAL (SLM)

Developed by Richard W. Arms Jr. in 1967, the Arms Index is calculated by dividing the advancing/declining ratio (AD ratio) by the advancing/declining volume (AD volume). The value 1 is especially important here, as crossing it indicates whether the market is strong or weak. The formula to calculate the TRIN Index is comprised of the following items:  Advancing Stock: They are stock issues that have increased compared to previous readings.  Declining Stock: They are stock issues that have decreased compared to previous readings.  Advancing Volume: It is the number of stocks that have advanced.  Declining Volume: It is the number of stocks that have declined. How to Calculate the Arms Index? The Arms Index can be calculated using various charting applications and software, but it can also be calculated by hand. 1. First, calculate the AD ratio (Advancing Stock divided by Declining Stock) at set intervals. 2. Calculate the AD Volume (Advancing Volume divided by Declining Volume). 3. Divide the AD Ratio by AD Volume. 4. Then, record the results, plot on a graph, and repeat the process at the next time interval. 5. The last step is to connect multiple data points to form a graph to see the movement of the TRIN over time. TRIN Readings The TRIN indicates three possible results. The value 1.0 is especially important here, as crossing it indicates whether the market is strong or weak. The first result is an index value of 1.0, which means that the AD ratio is equal to the AD volume ratio, and the market is in a neutral state. The advancing volume is distributed evenly over the advancing issues, and the declining volume is evenly distributed over the declining issues. 223 CU IDOL SELF LEARNING MATERIAL (SLM)

The second result is a result of less than 1.0. It means that the AD Volume results in a higher ratio than the AD Ratio and is a strong indicator of a bull market. A TRIN reading below 1.0 usually results in a strong price advance, which is due to the strong volume in rising stocks. The third result is a reading above 1.0. It means that the AD Volume results in a lower ratio than the AD ratio and is a strong indicator of a bear market. A TRIN reading above 1.0 results in a strong price decline due to the strong volume of declining stocks. In other words, there is a greater volume in the average declining stock than in the average advancing stock. Importance of the Arms Index The Arms Index plays an important role in finance – to the extent that the TRIN is displayed on the New York Stock Exchange’s central wall display continuously during trading hours. The Arms Index distinguishes itself from other indices by incorporating the volume of stocks into consideration. There are many indices available, and companies should use more than one to provide a more thorough analysis. It is important to note that the farther away from 1 the TRIN reading is, the larger the contract between the buying and selling of stocks. Typically, a value exceeding 3 indicates an oversold market, and bearish sentiment is too dramatic. It might lead to an upward reversal in the prices soon. Also, a TRIN reading below 0.5 might mean that the market is overbought, and bullish sentiment is overheating. It is important to refer to several indices instead of only one to get a better understanding of the situation. In addition, not only is the TRIN reading examined carefully, but the rate of change during the day is also looked at closely to see if the market may change directions in the future. Arms Index Pros and Cons As an oscillator, the Arms Index provides real-time information on the TRIN and enables the user to know when to buy or sell the stock in question. By separating the stocks into advancing and declining ones, the index is easy to read and understand. Its incorporation of stock volume is especially important to users. However, there are also drawbacks to the Arms Index. For example, the system might include errors in the analysis and give false readings as a result. As such, the Arms Index needs to be used in conjunction with other indices to get cohesive results. 14.4 SUMMARY  Breadth indicators don't typically provide trade signals on their own, but rather provide an overall picture of the health on an index. 224 CU IDOL SELF LEARNING MATERIAL (SLM)

 Typically, when a breadth indicator is rising, and the stock index is rising, it shows there is strong participation in the price rise. This means the price rise is more likely to sustain itself.  The same concept applies to a falling breadth indicator and a falling stock index value.  When the breadth indicator and a stock index diverge, that may forewarn of a reversal. Fewer stocks are moving in the stock index's direction. This means the stock index could be setting up to change direction.  Breadth indicators can help determine if a market is more likely to rise or fall.  Breadth indicators can help determine the strength of a bullish or bearish trend.  Most breadth indicators are prone to some situational anomalies. While traders typically look for volume to increase as prices move further, this doesn't always happen. Trends can last a very long time on decreasing volume or even decreasing stock participation, which will lead to the breadth indicators diverging but not necessarily resulting in a price reversal.  Breadth indicators are assemblages of data that point to a convergence or a divergence in securities markets.  An uptick indicator means a security is trading higher than the previous trading price, while a downtick means it's trading lower.  The advance-decline line indicator uses the same formula as the tick indicator but tracks a broader range of securities.  Breadth indicators can help investors predict cash flow in and out of the market.  If you use breadth indicators, make sure you read them as a broad perspective on the market; they cannot predict the performance of any given individual security.  In determining whether more cash is flowing in or out of the market, breadth indicators can be a reliable powerful predictive tool on market movement and momentum—one that can give investors a big edge over the competition on a regular basis.  The absolute breadth index is great when you combine signals with blue-chip stocks. This is because large-cap stocks are most likely to be impacted by movement in the broad market.  Using the ABI to identify trade opportunities for low float stocks is likely a nonstarter. Not because the ABI is wrong, it’s more about the volatility of penny stocks cares little with broad market activity. 225 CU IDOL SELF LEARNING MATERIAL (SLM)

14.5 KEYWORDS  Trading Index: An index is an indicator or measure of something. In finance, it typically refers to a statistical measure of change in a securities market. In the case of financial markets, stock and bond market indexes consist of a hypothetical portfolio of securities representing a particular market or a segment of it.  TRIN: (The TRIN Arms index is another old popular indicator that is based on the advance-decline issues and advance-decline volume data. With TRIN you must remember that it is a contrarian indicator - positive TRIN readings are considered bearish and negative TRIN readings are considered bullish.).  Breadth Indicators: (Breadth Indicators are technical studies aimed to analyse index listed stocks and separate them into Bullish (advancing) and bearish (declining) groups. Breadth indicators (also known as Advance-decline indicators) can be used for trading against broad market indices through options, futures, and mutual funds. They can also be used to increase the effectiveness of more specific signals by adding confirmations or warnings of upcoming trends.)  Tick Indicator: The NYSE Tick Index’s name is derived from the “ticks”—the actual trading price movement of a given security or index at any given time, as measured by upticks and downticks. An uptick denotes a security that’s trading higher than the previous trading price.  Advance-Decline Line Indicator: The Advance-Decline Line Indicator is much more comprehensive in the number of securities it tracks. The formula is the same as the Tick Indicator—weighing the value of the stock market based on the number of advancing securities against declining securities. 14.6 LEARNING ACTIVITY 1. Market breadth indicators give a different look at how the market is moving. They can show investors if things are generally moving up or down. Rather than looking at specific stocks, these numbers represent a more holistic understanding of the market’s behaviour. What Are Market Breadth Indicators works? ___________________________________________________________________________ ___________________________________________________________________________ 2. Traders predominantly use market breadth indicators to offer a glimpse of the market’s health. These numbers can be useful in uncovering hidden strengths or weaknesses in the movement of a specific index. This provides a different snapshot than looking at individual stock prices or even at a chart of the index. What Is the Purpose of Market Breadth Indicators? 226 CU IDOL SELF LEARNING MATERIAL (SLM)

___________________________________________________________________________ ___________________________________________________________________________ 14.7UNIT END QUESTIONS A. Descriptive Questions Short Questions 1. How do you determine breadth? 2. Does the bar chart have a time horizon? 3. How can you tell if breadth is bullish or bearish? 4. When do technical analysts say a stock has good relative strength? 5. How many types of trading charts are existed? Long Questions 1. What Does a Breadth Indicator Tell You? 2. Which of the following is not an example of a breadth indicator? 3. Which type of chart is formed using only closing price data? 4. What are trend line and trend length and express their roles? 5. Discuss the types of market breadth indicators and how much effective in the current scenario? B. Multiple choice Questions 1. Which is one of the most popular tools used by technical analysts? a. P/E ratio b. Book-to-market-value ratio c. Moving averages d. Growth rate of dividends 2. What is a bar chart used to illustrate? a. High, low, and closing stock prices daily b. Reversal in the direction of stock prices without consideration of time c. High, low, opening and closing prices daily d. Advances and declines of stock prices 227 CU IDOL SELF LEARNING MATERIAL (SLM)

3. Identify the correct option for the following: According to the Dow Theory, daily fluctuations and secondary movements in the stock market are used to identify the ___________. a. Intermediate trend b. Seasonal pattern c. Short-term trend d. Primary trend 4. Which of the following indicates a sell signal to technical analysts? a. The advance-decline line is rising in a falling market. b. The amount of short selling done by specialists is high. c. The resistance level is broken. d. Most stock market newsletters are bearish. 5. Which of the following indicates a buy signal to technical analysts? a. Both the Dow Jones Industrial Average and the Dow Jones Transportation Average are moving down. b. Odd-lot buying exceeds odd-lot selling. c. The advance-decline line is falling in a rising market. d. The stock breaks through the moving average line from below. Answers 1-c, 2-a, 3-d, 4-b, 5-d. 14.8 REFERENCES References  Clenow, Andreas. (10 August 2019). Anyone can Build Killer Trading Strategies in Python. Perpendicular Publishing; 1st edition.  O'Neil, William, J. (12 April 2009). How to Make Money in Stocks: A Winning System in Good Times and Bad, Fourth Edition. McGraw-Hill Education; 4th edition.  Gupta, Anjana. Kanwar, Puneet. Trading Pairs with Excel / Python: Advance Statistical Tools for Trading &back testing in Python/Google Sheets. Kindle Edition. Textbooks 228 CU IDOL SELF LEARNING MATERIAL (SLM)

 Morris, Gregory. McClellan, Tom. (21 November 2015). The Complete Guide to Market Breadth Indicators: How to Analyze and Evaluate Market Direction and Strength. Gregory L. Morris; Second Edition.  Clenow, Andreas. (15 June 2015). Stocks on the Move: Beating the Market with Hedge Fund Momentum Strategies. Equilateral Publishing.  Morris, Gregory. (16 October 2005). The Complete Guide to Market Breadth Indicators. McGraw-Hill Education. Websites  https://www.dtn.com/what-are-market-breadth-indicators/  https://elireview.com/2016/04/20/learning-indicators/  https://tradingsim.com/blog/category/breadth-indicators/ 229 CU IDOL SELF LEARNING MATERIAL (SLM)