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Deb Takes Measure of the Market

Case Problem 9.2

Deb Takes Measure of the Market

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Several months ago, Deb Forrester received a substantial sum of money from the estate of her late aunt. Deb initially placed the money in a savings account because she was not sure what to do with it. Since then, however, she has taken a course in investments at the local university. The textbook for the course was, in fact, this one, and the class just completed this chapter. Excited about what she has learned in class, Deb has decided that she definitely wants to invest in stocks. But before she does, she wants to use her newfound knowledge in technical analysis to determine whether now would be a good time to enter the market.

Deb has decided to use all of the following measures to help her determine if now is, indeed, a good time to start putting money into the stock market:

Advance-decline line

New highs-new lows indicator (Assume the current 10-day moving average is 0 and the last 10 periods were each 0.)

Arms index

Mutual fund cash ratio

Deb goes to the Internet and, after considerable effort, is able to put together the accompanying table of data.

Questions

Based on the data presented in the table, calculate a value (where appropriate) for periods 1 through 5, for each of the 4 measures listed above. Chart your results, where applicable.

Discuss each measure individually and note what it indicates for the market, as it now stands. Taken collectively, what do these 4 measures indicate about the current state of the market? According to these measures, is this a good time for Deb to consider getting into the market, or should she wait a while? Explain.

Comment on the time periods used in the table, which are not defined here. What if they were relatively long intervals of time? What if they were relatively short? Explain how the length of the time periods can affect the measures.

Dow Jones Industrial Average8,3007,2508,0009,0009,400
Dow Transportation Average2,3752,0002,0002,8503,250
New highs688585120200
New lows7560807520
Volume up600,000,000836,254,123275,637,497875,365,9801,159,534,297
Volume down600,000,000263,745,877824,362,503424,634,020313,365,599
Mutual fund cash (trillions of dollars)$0.31$0.32$0.47$0.61$0.74
Total assets managed (trillions of dollars)$6.94$6.40$6.78$6.73$7.42
Advancing issues (NYSE)1,1201,2781,2701,9161,929
Declining issues (NYSE)2,1301,9721,9801,3341,321
 
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