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Ways to Forecast the Trajectory of the S&P/ASX 200

 If only a crystal ball were available to forecast the performance of the S&P/ASX 200. Market participantsroutinely scour the literature for nuggets of information to make informed trading decisions. While no single best-practice approach is available since markets are variable, there are ways to cobble together an effective trading strategy.

Today, we’re going to take a look at 10 commonly used measures to assess the performance of the Australian Securities Exchange, specifically the ASX 200. A thorough analysis of these economic indicators, market performance measures, and trader sentiment is useful for determining the direction of the ASX 200.

Economists approach this topic differently, albeit with a broad-based perspective that includes the following:

  1. The level of the S&P/ASX 200 index

This is perhaps the most obvious measure and simply looks at the overall direction of the market. Judging from the current performance of the S&P/ASX 200, at 6945.15 (Friday, July 29, 2022) we can tell that the short-term performance is on the up and up, but the year-to-date is down 6.71%. When we factor in inflationary pressures(currently at 7.75%), GDP contractions, higher interest rates, and the performance of the US market, we get a better perspective of the potential ASX 200 levels moving forward.

2.The rate of changein the S&P/ASX 200 index

This measures how quickly the market is moving and can give an indication of whether it is overbought or oversold in the short-term. If the market is moving quickly (i.e. the rate of change is high), this may be seen as a negative sign, as it suggests that it is more likely to experience a correction. Conversely, if the market is moving slowly (i.e. the rate of change is low), this may be seen as a positive sign, as it suggests that it is less likely to experience a sharp correction.Watch out for whipsaw behaviour in the markets, since this indicates increased volatility.

  1. The level of trading activity

The level of trading activity on the ASX 200 can give an indication of investor confidence. If there is a high level of trading activity, this suggests that investors are generally bullish on the market and are buying stocks. This may be seen as a positive sign, as it suggests that there is good potential for future growth. And likewise, if there is a low level of trading activity, this may be seen as a negative sign, as it suggests that investors are generally bearish on the market and may be more likely to sell their stocks. Bullish sentiment is growth oriented, while bearish sentiment indicates the possibility of a pullback, correction, or a recession.

  1. The ratio of advances to declines

This measures how many stocks are rising versus falling and can give an indication of market sentiment. If the ratio is high, this means that there are more stocks rising than falling, which may be seen as a positive sign. However, if the ratio is low, this may be seen as a negative sign, as it suggests that there are more stocks falling than rising. Traders routinely watch this ratio to determine overall market sentiment.

  1. Economic indicators

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There are a range of economic indicators that can be used to assess the performance of the Australian Securities Exchange, such as GDP growth, inflation, unemployment, etc. A popular measure used by traders is retail sales. According to Trading Economics, retail sales in Australia rose by 0.2% month on month in June 2022 to AU$34.24 billion.

While anaemic (compared to every other month in 2022), this positive growth serves as an important barometer of overall economic activity. It provides an aggregated sales measure for retail goods and services over a time period. In Australia, retail sales growth has increased every month since January 2022, after dipping 4.1% in December 2021.

However, month on month retail sales growth in Australia is trending lower. This indicates that inflationary pressures are hurting household expenditure, by eating into disposable incomes. When the overall level of price rises is such that salaries and wages are sticky, but the cost of a baskets of household goods is rising, retail sales growth will contract. There is now strong evidence of this, based on data from the Australian Bureau of Statistics.

  1. Market breadth

This looks at how many stocks are participating in the overall market movement and can indicate whether it is broad-based or driven by a few individual stocks. If the market breadth is low, this may be seen as a negative sign, as it suggests that the market movement is not very broad-based and may be more susceptible to corrections.

By the same token, if market breadth is high, this may be seen as a positive sign, as it suggests that the market movement is more broad-based and therefore less likely to experience sharp corrections. Of course, it is important to remember that market breadth is just one factor to consider when assessing the performance of the Australian securities exchange

  1. Volatility

This measures how much the market is moving up and down and can give an indication of investor risk appetite. If the market is highly volatile, this means that there is a lot of movement and it can be more difficult to predict which direction it will move in. This may make some investors hesitant to trade or invest in the stock market, as they may be worried about incurring losses. However, some investors see high volatility as an opportunity, as they believe it presents more opportunities to buy low and sell high.

  1. Short interest

This measures how many investors are betting against the market and can give an indication of sentiment. Short interest is important for assessing the performance of the stock market because it can give an indication of sentiment. If there is a high level of short interest, this means that there are a lot of investors betting against the market, which may be seen as a negative sign. Conversely, if there is a low level of short interest, this may be seen as a positive sign, as it suggests that investors are generally bullish on the market.

  1. Insider buying/selling

This looks at whether company insiders are buying or selling their own stock and can give an indication of future prospects for the company.

Insider buying and selling patterns are important for the stock market because they can give an indication of future prospects for a particular company. If insiders (i.e. company directors, officers, etc.) are buying stock in their own company, this is often seen as a positive signal, as it suggests that they believe the company has good prospects for growth.

But if insiders are selling stock in their own company, this may be seen as a negative signal, as it suggests that they believe the company has limited upside potential. Of course, it is important to remember that insider buying/selling activity is just one factor to consider when assessing the performance of a stock; other factors such as analyst ratings and economic indicators should also be factored into your trading decisions.

  1. Analysts’ ratings

One reason why analyst ratings are an important barometer of the performance of a stock market is that they can give an indication of market sentiment. If analysts are generally bullish on a particular market, this is often seen as a positive signal, as it suggests that they believe there is good potential for future growth. Conversely, if analysts are bearish on a market, this may be seen as a negative signal, as it suggests that they believe there is downside risk.

 

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