Interpretation Of Nifty Indicators
Sentimental Indicators :
(1) Arms Index or Short Term Trading Index or TRIN
This index was developed by Richard Arms in 1967, also known as Short Term TRading INdex (TRIN), is a popular breadth indicator. It helps us to understand the buying and selling pressures in the market and acts as a valuable indicator to forecast the direction in which the market would move. If tweaked correctly, it helps us to understand an overbought and oversold situation on an intraday basis.
TRIN = [(No. of advancing stocks/ No. of declining stocks) / (Advancing volume/Declining volume)]
TRIN = [(AD ratio) / (AD Volume ratio)]
TRIN = [(AD ratio) / (AD Volume ratio)]
Interpretation : Bearish : If TRIN > 1 and Bullish If TRIN < 1
(2) PCR :
The put-call ratio is defined as the ratio of the Open Interest of put options and the Open Interest of call options.
Interpretation : Bearish : If PCR < 1 and Bullish If PCR > 1
(3) Volatility Index or VIX is one such indicator that helps us in understanding the sentiment in the market using implied volatility.Similar to historical or implied volatility, VIX indicates the change in upward or downward
movement from the average price of the index but does not specify the direction of change.India VIX is also commonly known as fear index or fear gauge.
Interpretation : When VIX is at a low, market participants are greedy. When it's at a high, they are fearful.
Golden rule of investing: Be greedy when everyone else is fearful and be fearful when everyone else is greedy.
Fundamental Indicators:
(1) PE ratio :
P/E > 24 = Dangerously overvalued
P/E > 20 < 24 = Overvalued
P/E > 16 < 20 = Fairly valued
P/E > 12 < 16 = Undervalued
P/E < 12 = Highly undervalued
(2) Price to book value :
P/BV > Average P/BV = OvervaluedP/BV < Average P/BV = Undervalued
Average P/BV 3.06
(3) Dividend yield :
If Dividend yield > Historic dividend yield = UndervaluedDividend yield < Historic dividend yield = Overvalued
Average Dividend yield is 1.38
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