If you trade stocks, more importantly if you trade stocks held in the major indices and you are not using market internals then you may be getting a blurry picture of what the market is actually doing. First let me say that market internals are not some "holy grail" of trading but some of them may be necessary to you so today we will take a look at a few.
One of the indices that traders follow is the S&P 500. Using this as a gauge, investors can see how their returns are stacking up against the broad markets. Well, one flaw in this is that the S&P 500 index is a market cap weighted index. This is just a fancy way of saying that the larger the company the more weight it has on the index. If Apple
One market internal that is very popular is the Advance-Decline Line. This is am indication of the number of stocks that are participating in the market rally or the market decline. Though many traders tend to utilize a chart to see the Advance Decline line its formula is quite simple. Add all the stocks that are up on the day, add all the stocks that are down on the day and take the difference. This indicator can help you get a better feel for the real participation behind a rally or decline.
Another internal that investors like to use is the 52 week high/low. This is another indicator that can quickly help you see the underlying strength in stocks. What you are looking at is that number of stocks hitting new 52 week highs vs. 52 week lows. In other words, it's a look at real leaders vs. real laggards. The formula is again quite simple and the results are usually viewed on a chart. Add up all the stocks making new highs, add up all the stocks making new lows and then take the difference.
There are a handful of other popular market internals that can help you avoid some false readings, but these should help you get started to see if this is something you want to explore further.
