In case you’re in a hurry:
- Blended Market Indicators combine multiple financial instruments to capture a more accurate market sentiment.
- It balances equity exposure with safe-haven assets and risk indicators.
- Using Blended Market Indicators helps mitigate bias and enhances decision-making.
- It provides a holistic market perspective, smoothing out noise and offering clearer signals.
- Recent market turmoil highlights the benefits of the Blended Market Indicator in guiding investment strategies.
- This method counters media-driven market panic and aligns with data-driven analysis favored by major investors.
Blended Market Indicators for Market Analysis
I know how you are feeling today (Black Monday) as an investor. I lost money, too, and it stings, but that’s all part of the game. Thankfully, I was able to mitigate the risk of major losses and find opportunities when many were panic selling. As an active trader and market enthusiast, I’ve always sought ways to gain an edge in understanding market movements. Traditional methods of relying on single indices or individual securities, like the S&P 500 (SPY), VIX, or specific ETFs, offer a somewhat narrow perspective that can get you into a lot of trouble if you are not looking at many other variables around the same time frame. The market is a complex, interwoven system, and focusing on a single metric can sometimes lead to misleading conclusions. To address this, I started using composite scoring and Blended Market Indicators—a technique that has profoundly enhanced my market analysis and trading decisions.
The Concept of Blended Market Indicators
Blended Market Indicators involve combining multiple financial instruments into a single, cohesive metric. The idea is to capture a broader and more accurate picture of the market’s overall sentiment and direction. Instead of zeroing in on one index or indicator, Blended Market Indicator aggregates several key metrics, balancing their strengths and weaknesses.
Now if you are a Trading View user, you can type this in your search window when looking for securities, funds, crypto, etfs, and so on. However, with Trading View, this is limited, and in a perfect world, I would love to add way more variables to make it more precise, but hey, it’s better than nothing. So here’s one of many examples for my approach to a Blended Market Indicator encapsulated in a formula to better predict the US Stock Market movements:
US Economic Blended Market Indicator= (AMEX:SPY2+NASDAQ:QQQ+AMEX:VTI+AMEX:IWM)/(NASDAQ:TLT2+AMEX:GLD+TVC:VIX+TVC:DXY)
Breaking Down the Formula
Equity Indices and ETFs:
- SPY (S&P 500 ETF): This represents a broad spectrum of the U.S. stock market, the 500 best performing US companies.
- QQQ (NASDAQ-100 ETF): Focuses on technology and growth stocks.
- VTI (Vanguard Total Stock Market ETF): Offers exposure to the entire U.S. stock market, including small, mid, and large-cap stocks.
- IWM (iShares Russell 2000 ETF): Concentrates on small-cap stocks, providing insights into the more volatile, growth-oriented segment of the market.
Safe-Haven Assets and Risk Indicators:
- TLT (iShares 20+ Year Treasury Bond ETF): Reflects long-term U.S. government bond performance, a traditional safe-haven asset.
- GLD (SPDR Gold Shares): Represents gold, another classic safe-haven investment.
- VIX (CBOE Volatility Index): Measures market volatility and investor sentiment.
- DXY (U.S. Dollar Index): Tracks the value of the U.S. dollar against a basket of foreign currencies, indicating global economic strength and investor risk appetite.
Again, it does not have to be this complex, and different variables can paint differnt pictures. Here are a few more Blended Market Indicators that I use if you want to try them out on Trading View:
- S&P 500 and Consumer Spending: (AMEX:SPY+AMEX:XLY)/2
- Tech: 0.20*(NASDAQ:QQQ+AMEX:XLK+NASDAQ:AAPL+NASDAQ:MSFT+NASDAQ:GOOGL+NASDAQ:AMZN+PSE:FB+NASDAQ:TSLA+NASDAQ:NVDA)/9
- Housing Economy: (AMEX:ITB+AMEX:REZ+AMEX:XHB+NASDAQ:Z)/(AMEX:SPY+NASDAQ:TLT+AMEX:UUP+AMEX:GLD)
- Bitcoin: BITSTAMP:BTCUSD/(TVC:DXY+BATS:TLT+TVC:VIX+BATS:GLD)
- Chinese Economy: (BATS:FXI+BATS:MCHI+BATS:ASHR+BATS:EWH+BATS:KWEB)/(FX_IDC:CNYUSD*BATS:DBC)
Pro Tip: Now, here is if you want to get more advanced. You can add weights to each variable or index, as shown in this example. However, beware of this: there is a character limit:
Advantages of Blended Market Indicators
Holistic Market Perspective:
By using a Blended Market Indicator, I can view the market through a more comprehensive lens. Each component of the formula offers unique insights:
- Equity ETFs like SPY, QQQ, VTI, and IWM provide a diversified snapshot of various market segments.
- Safe-haven assets and risk indicators (TLT, GLD, VIX, DXY) balance the equity exposure, giving a sense of market sentiment and risk aversion.
This balance helps smooth out the noise and offers a clearer signal of the market’s true state.
Mitigating Individual Bias:
Relying on a single index or security can introduce bias and overemphasis on that particular metric’s movements. For example, focusing solely on SPY might lead to overconfidence during a bull run, ignoring potential risks highlighted by rising VIX levels or a strengthening DXY.
Blended Market Indicators reduce this risk by diversifying the inputs. If SPY is performing well but TLT and GLD are also rising (indicating risk aversion), the Blended Market Indicator reflects this complexity, prompting a more cautious analysis.
Enhanced Decision-Making:
In practice, this Blended Market Indicator helps me make more informed trading decisions. For instance, a rising trend in the Blended Market Indicator suggests overall market strength, balancing equities’ performance with subdued risk indicators. Conversely, a falling trend might indicate underlying market weaknesses, even if equities are still performing well.
Using custom indicators on TradingView, I can track this Blended Market Indicator in real-time. This dynamic approach allows me to react swiftly to changing market conditions, rather than relying on outdated or incomplete information.
Real-World Application
Implementing this Blended Market Indicator has significantly improved my trading outcomes. Here are a few examples:
Bullish Confirmation:
In early 2023, while SPY was showing a strong upward trend, my Blended Market Indicator revealed a less bullish picture due to rising TLT and DXY. This prompted me to adopt a more cautious approach, avoiding potential pitfalls.
Risk Management:
During periods of market volatility, the Blended Market Indicator has helped me identify genuine risk-on or risk-off environments. For example, in mid-2022, despite stable equity performance, a rising VIX and strengthening DXY in the Blended Market Indicator signaled increasing risk, guiding me to adjust my portfolio accordingly.
The Media’s Role and the Retail Investor’s Dilemma
Today, headlines have been flooded with news of a global market meltdown. Articles detailing sharp drops in indices, massive sell-offs in tech stocks, and alarming economic indicators are commonplace. While such news is factual, it often leads to panic among retail investors. We can really thank those clickbait headlines. This panic can result in hasty decisions, like selling off holdings at a loss, while seasoned investors and hedge funds swoop in to buy these discounted securities. And thus, this perpetuates the disparity where the rich keep getting richer sadly.
Major investors and hedge funds don’t make decisions based on the latest headline from CNBC or Jim Cramer’s latest take. Instead, they delve deep into metrics, data, algorithms, fundamentals, and earnings. They analyze comprehensive and often complex data sets to inform their strategies, unlike the retail investor who might react impulsively to sensationalized news.
This is what the media is telling me today. Had a younger, more naive version of me seen this, I would have been panic selling.
Today marks August 5th, and I am writing this article around 3:00 PM. It was a crappy, crappy day, and yes, I lost money, but my Blended Market Indicator indicated panic selling is a bad idea, and it looks like a rebound has already started when looking at my Blended Market Indicator on a 2-hour view. It was motivation enough to go in and buy some stocks rather than sell. As the old Warren Buffet saying goes “Buy when blood is in the streets.”
Recent Market Turmoil
Take, for instance, the market drop on a recent Monday:
- The Dow Jones Industrial Average fell by 1,032 points (2.6%), marking its worst day in nearly two years.
- The Nasdaq Composite and S&P 500 lost 3.9% and 3.2%, respectively.
- Major tech stocks were hit hard: Nvidia dropped 7.2%, Apple fell over 6% after Berkshire Hathaway cut its stake, and Tesla declined by 5.2%.
- In Asia, Japan’s Nikkei experienced its worst day since the 1987 Black Monday crash, with a 12.4% loss. The U.S. Treasury yields tumbled as investors sought safe havens, driving the 10-year note yield to its lowest level since June 2023.
The Strategic Response of Major Investors
Despite these alarming headlines, some see this as a buying opportunity. Macquarie’s Viktor Shvets described the market sell-off as a “stampede” driven by fear rather than fundamentals. He argued that the U.S. might avoid a recession and that tech valuations aren’t in bubble territory. For savvy investors, such irrational stampedes create opportunities to buy undervalued assets.
The Power of Blended Market Indicators in Turbulent Times
This is where the Blended Market Indicators prove invaluable. By examining a Blended Market Indicator that includes diverse metrics, we can navigate these volatile periods with greater confidence. For instance, even as the Dow and Nasdaq plummeted over the last 3 days, the Blended Market Indicator helped me gauge the underlying strength or weakness of the market more accurately. If safe-haven assets and risk indicators showed stability or positive trends, it signaled that the market panic might be overblown, guiding me to consider buying opportunities rather than joining the sell-off frenzy.
Blended Market Indicators has transformed my approach to market analysis. By incorporating multiple variables into a single, balanced metric, I gain a more nuanced understanding of the market’s true state. This method mitigates the limitations of relying on individual indices or securities, providing a clearer, more reliable signal for trading decisions.
As I continue to refine and expand this approach, I am confident that Blended Market Indicators will remain a cornerstone of my trading strategy, offering invaluable insights and helping me navigate the ever-changing financial landscape with greater precision and confidence. For retail investors, embracing such comprehensive methods can also serve as a powerful tool to counteract the often exaggerated impact of media-driven market panic.