Stan’s Stock Market Seismometer

Introduction

“Stan’s Stock Market Seismometer” is my crude attempt at measuring how far the Stock Market has moved away from its long term trend.  It’s essentially a control chart or run chart.  Do not use this for financial advice (which I am not qualified to give).  It is for academic interest only.

Methodology

Monthly average Australian Stock Exchange All Ordinaries (AORD) close indexes are sourced from the Yahoo! Finance website, adjusted for dividends and splits.  I then run a trend line through the data, and look at the departure of the monthly averages from that long term trend line.  The departure data are normalised so that they have a mean of zero and variance of one.

The seismometer doesn’t track the direction of the market, only whether it is “in control”.  A stock market that is in control will have values that centre around the horizontal zero line and within the -1 and +1 control limits.

Most recent complete month

As at the end of October 2012: -2.3 = Highly over-sold

Control limits

[+3, +∞]: Extremely over-bought

[+2, +3): Highly over-bought

[+1, +2) : Moderately over-bought

(+1, -1): In control

[-1, -2): Moderately over-sold

[-2, -3): Highly over-sold

[-3, -∞]: Extremely over-sold

——

NOT to be used for FINANCIAL ADVICE. For academic interest only.

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