Assessing Market Conditions
Approach
Indicators
The fundamental Vanachine approach is to:
- Buy when the market conditions (prices) are low but climbing,
- Sell when they are high but falling, and
- Wait or hold at other times.
As illustrated in the chart below, this maximises the likelihood of making profits.
The Vanachine process uses the few key market indicators listed below to construct a custom index - the Vandex that provides a single, simple measure of the "temperature" of the market.
The first, and most important indicator of the condition of a stock market is the VIX - a Volatility Index. Essentially the VIX tells us how much variance there is in the expectation of future stock market prices. Specifically, a VIX value of 20 means that there is a 66.7% likelihood (one standard deviation) that the stock market as a whole will be trading within 20% (up or down) of its current level in the next 30 days.
It is our key measure of confidence or market sentiment. (See more details here).
The Relative Strength Indicator (RSI)
Another key indicator is the RSI, which measures the relative amount of upward or downward momentum in the prices of a stock, a group of stocks, or even the whole stock market. An upward trending RSI value that is or has just been less than 30 indicates good buying conditions. A downward trending RSI value that is of has just been higher than 70 is the best time to sell.
It is our key measure of the direction and size of movement in the price of the market. (See more details here).