Gauging Market Momentum

Many professional investors use the Standard & Poor's 500 Stock Index to measure the overall market trend. Portfolio managers are often ranked by their ability to "out-perform" the S&P. The S&P 500 is the average price of 500 stocks (400 industrials, 40 utilities, 20 transportation companies and 40 financial institutions) traded over the New York Stock Exchange. The index is adjusted on a value-weighted basis (for the number of shares outstanding) so that a smaller company does not affect the movement of the index to the extent of a larger company such as IBM for instance.

Market momentum measurements seek to highlight the intensity of trend movements. They are used by analysts as a means for forecasting market turning points. They do that by constructing a momentum chart.

A momentum chart is calculated by subtracting the value of the market x-days ago from today's value, in order to find the number of points that the index has changed. That change is then divided by the value of the market x-days ago, to calculate the percentage that the index has changed in the last x-days.

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