 Hello and welcome to the session this is Professor Farhad in which we would look at four technical analysis that deals with sentiment indicators and they are in front of you on the screen which is trend statistics, confidence index, short interest and put call ratio. Before we start I'll always like to remind you to connect with me on LinkedIn if you haven't done so. YouTube is what you would need to subscribe. I have 1800 plus accounting, auditing, tax, finance as well as Excel tutorial. If you like my lectures please like them and share them. If they help you it means they might help other people and on my website you'll find additional resources to complement your accounting, your finance courses and if you are studying for your CPA. Let's start with the first indicator which is trend statistics and sometimes trend statistics is called arms index because the person that created it I believe his name is Richard Arms in 1967 and the trend statistics is just so you know what the name is coming from it's trading TR index this is where the name is coming from here what you do what you are doing is you are looking at the volume so market volume or the size of the market is sometimes used to measure the strength of the market rise on and fall so what happens is technicians what they do they look at the volume and they say market advances to be more favorable sign of continued price increases when they are associated with increased trading volume what does that mean it means when the stock market goes up that's fine but you also have to look at the volume for example if the volume yesterday was five million and the and the market was down and the day the volume is two million it went up well it's not a really a good indicator because the prior day the volume on the downside was higher so you want a large volume when the prices are going up if you want to be if you want to be confident also market reversers are considered more bearish when they are associated with higher volume it's when there are more selling than buying but much much more selling than buying when the volume is higher then we assume on on the way down the market is more bearish now how can we measure this this indicator this is what the trend statistics is coming from it's basically two ratios divide them by each other simply put you're going to take the volume of the clienter divided by the number of the clienters this is ratio number one volume of advancing them divided by number of advancing this is ratio number two then you will take those two ratios and divide them by each other so the ratio of average trading volume and declining issues to divided by the average volume and advancing issues so ratio above one are considered bearish because the falling prices would then have a higher average volume than the advance stocks indicating net selling is the selling pressure now that's you know those those numbers again they are a little bit subjective it depends how you interpret them so let's take a look at an example and let's take a look at this this issue on I don't I don't have the date this is for the NYSC the number of advances the clienters the number the volume the share volume for advancing the share volume for declining now we can plug in the formula those are the ratio of the clienters divided by the ratio of advances and the ratio is one point four five seven again if the numerator is higher if this if the numerator is higher you're gonna if the numerator is higher than the denominator if the numerator is higher than the denominator you're gonna have ratio more than one obviously so it's you have more bearish than more bearish it's is is explained as more bearish but be aware for every buyer there must be a seller of stock as well so rising volume and rising market should not necessarily indicate a larger imbalance of buyers versus seller for example if we have a trend above one like one point four five seven it's considered bearish that's one way to look at it it could equally be interpreted as indicating there's more buying activity in the declining issue you could also look at it that way so it's not only one point four it's bearish or less than one it's bullish you just have to look at put it into context that's the whole point it's understanding what the statistic tells you and put it into context the second indicator we're gonna look at is the confidence index and the confidence index also known as the bearing confidence index because the bearing created this index and basically it's the ratio that's a ratio obviously what's a ratio dividing two numbers of average yields on the tap ton rated corporate bond divided by the average yield on the 10 intermediate great corporate bond simply put in the numerator you have the excellent bond the triple a the double a bond so in the numerator you have the good bonds and the denominator you have maybe the triple b's and the double b's bond intermediate bond so what are you trying to find out you're trying to find out what's the spread between them for example just to give you an example if the triple a if the triple a and a on average are yielding a 3.8 percent and well let's say four percent let's say let's assume they are yielding four percent point zero four and the intermediate bond are yielding let's assume seven percent seven percent what can we say what's the ratio if we divide four by seven it should give us approximately point five seven point five seven now is this good is this bad well we have to look at something else like how would you know if this is good or bad let's assume the prior day the ratio or prior period or last week the ratio was point zero three over point zero four which is point seven five i just randomly selected 57 and 75 what does that mean okay always the ratio will be less than one i want to make sure you understand this why because in the numerator you have the higher yielding bond which should have a lower rate than the intermediate bond so always the numerator will be will be i'm sorry yes the numerator will be lower than the denominator the numerator will always be lower than the denominator therefore it's always less than one the ratio is less than one the closer it is to one so if we compare 57 to 75 75 is closer to one the closer to one it means we have more confidence in high yield bond and intermediate bond it means everybody is doing well it means everybody is earning good yield on their corporate bond if there's a high spread the reason there's a high spread because that's that's the the amount of risk is higher between the triple a and the and the triple b bond so it's like it's it's a bad signal in a sense risk is increasing so the ratio would always be less than one because bonds rated higher rated bond will offer low lower yield to maturity of course the presumption is what's the presumption why do we do why do we compute this bond the bond traders revealed a trend that will emerge soon in the stock market why because bonds deal with money they deal it's a credit market the credit market drives everything if companies once operate they need money where do they go they go to the credit market so if the credit market if the triple a bond and a triple triple a and the triple b the spread between them is not too large it means there's not a lot of risk when there's risk in the market the spread will increase therefore there's a risk it's an indication that risk will spill into the stock market therefore it's basically it's like a signal signal to what's going to happen next so if it's easy credit companies can always borrow money and buy other companies so that times are good people can spend because there's not a lot of risk in the credit market okay so when bond traders are optimistic about the economy they might require smaller default premium on lower rated bond that's that's the whole idea it means you have confidence you don't want you you don't want to ask for a lot of premium in comparison to the premium bond so the spread will would be smaller therefore the ratio will be closer to one so hence the yield spread will narrow and the confidence index will approach one it will never be one there's no way it will be one in a sense that now the high yield bond and the lower yield and the intermediate bond are are yielding the same the same the same yielding the same that that that's that doesn't make any sense they're either they're all triple a or they're all triple b then okay therefore higher values of confidence index are bullish signals i believe this is this like this this bearing confidence index this is a good signal i would look at that's my personal opinion i would look at this um to i would look to use this more than i would look to use for example the trend statistics again this is for personal use and this basically interest rate spread is was a good indicator before the housing crisis this is what happened during the housing crisis the triple a or the government government bonds and the corporate bond which is the private there was a big spread between them it means there's a high risk short interest is another confidence indicator is the total number of shares of stocks currently sold short in the market what does it mean sold short it means you sell it then you buy it later you borrow the money to sell it then you buy it later what does that mean when you sell it means you are bearish some technician interpret high level of short interest as bullish others as bearish so we're going to look at both ends why would you interpret it as a bullish sign why would you interpret it as a bearish sign because you could interpret it either way the bullish the bullish perspective what's going to happen is this you shorted all these stocks eventually you're going to have to buy them unless the company go out of out of business eventually you're going to have to cover your position when you cover your position you're going to have basically a counter effect you're going to bid the prices up so the bullish perspective because all short sales must be eventually covered short sellers eventually must purchase shares to return to return the one they have borrowed i meant to say borrowed the stock not borrowed money but technically you're borrowing money by buying the stocks and shorting the stocks short interest represent a signal of future demand for the stock this is what the bullish are saying well if there's a high short in the market that's good eventually it's going to go up short interest a short sales are covered the demand created by by the share prices will force prices up so eventually the prices will be bid it up now the bearish interpretation now we're looking at the bearish interpretation is based on the fact that short sellers tend to be larger more sophisticated by more sophisticated investors so who short stocks i do short stocks i will not consider myself in any way shape or form sophisticated investor or a confident investor matter of fact if people do exactly the opposite of what i do you'll be fine but the point is not your average investor short stocks you need to know a little bit more about the market i i don't short i don't short short stocks actually i only shorted one stock in my lifetime and i cover it before it went down to zero it's a gm before it went bankrupt so you just have to be very careful if i kept it i would have did very well it was 22 i shorted it i covered it early you know i just did not have the guts to keep on going uh yes so the point is if it's if there is a lot of bearish it means it's it's it's it's a pessimistic signal because people that know what's going on more confident will short the market so that's why that's the bearish interpretation so increase short interest reflect bearish sentiment by smart money which would be a negative signal for the market prospect now i'm gonna show you and let me clear this the short interest for tesla and this is not the full picture because after july tesla even went up to it crosses 2000 but the point is this is the short interest of tesla this line here so notice at some point we had a lot of short interest this is in millions in millions of shares so multiply by six by you add three zeros to this so notice as the stock price start to go up of tesla short interest people started to cover their short so as they're covering their short now who's driving who you don't know what are the short knowing are the short saying well the stock's gonna go up i'm gonna cover as it might cover the stock price goes up as the stock price goes up more short sellers would say well the stock's going up let me sell my cover my position as you cover your position the stock price will go up but here you can clearly see as as the stock keep on going higher and higher basically just straight line short interest just dropped okay now one way to look at this is say look now it is time now means when the stock reaches 2000 you like there's really there's like practically no short interest now it's time to short tesla okay now it's time to short tesla it's one way to look at it or it's time to say hold on a second whoever shorted tesla were burned and if you're not aware of this at least two or three hedge funds they shorted tesla they were part of this group and they basically they thought tesla will not survive obviously tesla survive and thriving and what happened to their funds they basically they went out of business simply put so it's very interesting how you read or the short interest you need to time it properly it is like everything else in the market you need to time it properly but short interest is extremely important because you are really the one like somebody else is pulling against you so you have to know when to short and when to uh when to go long the put call ratio it's very similar or i would interpret it very similar to to the short interest um what is a call what is a put a call option gives the investor the right to buy the stock you have a you have call option when you are optimistic when you are bullish put option gives you the right to sell the stock that's when you are pessimistic you want to protect yourself so what you do is you find the ratio for for example for a particular stock or the market overall how many puts do we have in relationship to calls the ratio of outstanding put option to outstanding call option you could do it for example for tesla specifically or look at all the calls and all the put options and often what people look at is the call and put option on the smp 500 because it's reflecting the whole market and if there's more puts it's a pessimistic if there's more call it's optimistic obviously what you want a ratio um a ratio greater than one it's it means it's bullish bearish because you have more uh more puts than calls okay because the put option put options the well and falling market while the call option the well and rise in market ratio is taken as a sign of the broad investor pessimism and a coming in market decline because you are protecting yourself the put are increasing contrarian investors on the other hand believe that a good it's a good time to buy when the rest of the market is bearish so what you do is you look at this and say okay everybody is bearish it's the market is going down it's time to buy because stock prices are unduly depressed so it's time to buy therefore they could present themselves as an opportunity to buy when you have this so again it depends how you interpret those signals the most important is you understand the basics of these signals as always i'm going to remind you to like this lecture if you like it share it put it in playlist and don't forget to visit my website farhatlectures.com for additional resources for this course as well as other accounting and finance courses good luck study hard and most importantly stay safe