Book Review: Market Indicators

Every one one us has limited bandwidth for analysis of data.  We pick and choose a few ideas that seem to work for us, and then stick with them.  That is often best, because good investors settle into investment methods that are consistent with their character.  But every now and then it is good to open things up and try to see whether the investment methods can be improved.

For those that use market indicators, this is the sort of book that will make one say, “What if?  What if I combine this market indicator with what I am doing now in my investing?”  In most cases, the answer will be “Um, that doesn’t seem to fit.”  But one good idea can pay for a book and then some.  All investment strategies have weaknesses, but often the weaknesses of one method can be complemented by another.  My favorite example is that as a value investor, I am almost always early.  I buy and sell too soon, and leave profits on the table.  Adding a momentum overlay can aid the value investor by delaying purchases of seemingly cheap stocks when the price is falling rapidly, and delaying sales of seemingly cheap stocks when the price is rising rapidly.

Looking outside your current circle of competence may yield some useful ideas, then.  But how do you know where you might look if you’re not aware that there might be indicators that you have never heard of?  Market Indicators delivers a bevy of indicators in the following areas:

  • Options-derived (VIX, put/call)
  • Volume and Price driven (Money flow, rate of change, 90% up/down days, and more)
  • Where the fast money invests (money in bull vs bear funds, sector fund sizes, and more)
  • Analyzing the likely motives of other classes of investors (margin balances, short interest, etc.)
  • Price Momentum and Mean-Reversion
  • Measuring asset classes and sectors using fundamental metrics  (Fed model, sector weightings, Q-ratio, etc.)
  • Investor sentiment surveys
  • How to use analyst opinions, if at all?
  • News reporting and reactions of stocks to news
  • Odd bits of news (CEO behavior, little things that indicate a qualitative change in the life of a company)
  • Insider buying and selling
  • Commodity market data (COT, etc.)
  • Bond market behavior (credit cycle, Fed moves, Credit Default Swaps, and more)
  • Changes in the capital structure (M&A, equity/debt issuance, etc.)
  • Monitoring the greats (13F filings)

No one can use all of these indicators.  You can probably only use a fraction of these indicators.  But being aware of how others view the market can widen your perspective, and help to reduce negative surprises on your part.

Quibbles

By its nature, since the book cuts across a wide number of areas in 216 short pages, you only get a taste of everything.  I liked this book, but there is room for a second book in this area — one of additional indicators passed over (I have a bunch!), or going into greater depth on the indicators covered.

Who will benefit from this book?

You have to have a quantitative bent, at least to the level of being willing to go out and collect simple data in order to benefit here.  Now, most serious investors do that, so I would say that serious investors can benefit from the “cook’s tour” of market indicators that this book gives, unless they are so serious that they know all of these indicators.  (Like me.)

If you would like to buy the book, you can buy it here: Market Indicators: The Best-Kept Secret to More Effective Trading and Investing.

Full disclosure: This book is unusual for me in two ways.  First, the author (not the PR flack) sent me a copy, with a nice handwritten letter thanking me for my blog and my assistance.  That is why there is the second reason.  Pages 80-81 summarize the longer argument made in my blog post, The Fed Model, where I take the so-called Fed model, and rederive it using the simple version of the Dividend Discount Model, giving a more robust model with reasonable theoretical underpinnings.

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