Various Technical Indicators for Long Term Stock Forecasting

There are more than 100 indicators in a technical analyst’s arsenal. These can be divided into a few categories. Some send clear signals of a change in trend when stocks reach a designated range. Others are useful only when they hit extreme degrees. Most must be used in conjunction with others. Moreover, certain indicators are most telling over shorter periods, while others are most useful in reading secular trends. Following are some of the indicators used in stock technical analysis.

Cyclical Technical Analysis Indicators

One stock market cycle, normally four to five years. Cash and cash flow indicators work particularly well on a cyclical basis. During this most recent cycle, the most important indicator has been cash flow from the public indirectly buying equities through mutual funds.

You see, there are two conditions necessary for a bull market to end:

1) The public stops buying; and

2) fund managers decide not to invest the cash coming in from investors.

In the past, the market has gone up because the public has bought mutual funds and fund managers have immediately put that money into equities.

Each month, the Investment Company Institute (ICI) reports the net fund sales to the public, the cash positions of mutual funds, transactions by portfolio managers, and switches between fixed-income and equity funds by the public.

Watching these figures over a number of months would enable a technical analyst to spot a major trend reversal.

Mutual fund cash under 5% is considered low or bullish and above 12% high or bearish.

Cash flows give you a picture of the demand for equities. New equity financing gives you a picture of supply.

Initial public offerings and secondary offerings, less corporate share repurchases, are referred to as net equity financing. The figure is reported in the Federal Reserve Flow of Funds numbers. A contracting supply is bullish, and a growing supply is bearish.

Foreign buying and selling of U.S. stocks and U.S. buying and selling of foreign stocks is another cyclical supply/demand indicator. The technical analyst is interested in whether U.S. investors are spending more money abroad than foreigners are spending here, and if the fundamentals stack up. If they are, it would be negative for the U.S. market. This information is available from the Securities Industry Association.

Secular Technical Analysis Indicators

Two or more economic or stock market cycles, normally lasting 20-30 years. Secular technical analysis indicators measure the long term. In general, they can only tell you how old a cycle is, rather than when it might change. Thus, a bearish reading in a secular indicator alone would not cause the technical analyst to become bearish on stocks in general.

Secular technical analysis indicators can be classified into two groups:

Asset allocation technical analysis indicators

Asset allocation technical analysis indicators look at the way in which individuals and institutions are structuring their portfolios.

At the beginning of a secular uptrend, people generally own very little stock and have most of their money in bonds and cash. Over time, money will flow into equities.

Thus, the more money in equities, the older the trend.

Data on asset allocation is obtained from the Federal Reserve’s Flow of Funds statistics.

Valuation technical analysis indicators

Valuation technical analysis indicators measure people’s confidence in stocks.

Among the most popular valuation measures are multiples and yields.

For example, when people are willing to buy and hold equities with historically low yields or with very high P/E multiples, it tells us they are very bullish on the appreciation prospects for stocks. Payout ratios are also important. The optimism implied by low yields would be diluted somewhat if payout ratios were also low.

Medium Term Technical Analysis Indicators

Three to six months. The medium-term horizon is the most important time frame in technical analysis, since it is the one in which most investors operate. Performance by professional fund managers is measured quarterly, and most mutual fund investors receive statements quarterly.

Measures of psychology, or sentiment indicators, are the best indicators for the medium term. They tell you how bullish and bearish different market participants are.

There are three keys to keep in mind with sentiment indicators:

Sentiment indicators are only useful when they reach extremes. You can’t use sentiment indicators without considering what the market is doing. You need to see three components to signal a bottom in the market:

1) traders liquidating;

2) investors buying; and

3) stability after a decline.

Sentiment indicators can signal a final top in the market three or four months ahead. However, they usually lead bottoms by only a few weeks. There are many kinds of sentiment indicators, including polls and transactional indicators. Polls tell us whether people are bullish or bearish. Transactional indicators tell us what investors are actually doing in the market.

source https://www.stockmarket.today/news/various-technical-indicators-for-long-term-stock-forecasting/