Market Internals Take the Pulse of the Stock Market

Traders vote on stock market direction with their dollars

It's always important to understand the way the market is trending and to try to anticipate if a change is coming if you're going to invest. Traders regularly look for opportunities through following a trend or when the market reverses direction.

Unfortunately, there are no real surefire direct signs that will unequivocally tell you what the market is going to do in the very near future. But this isn't to say that you can't get a feeling for coming changes.

You can get a good idea of upcoming trends by watching the flow of money into and out of the market.

Yes, it's a little like rolling the dice, but as you get better at it, the process becomes more reliable. The idea is that if more money is going into the market (buyers) than is coming out (sellers), you can expect prices in general to continue rising. Here are some general rules of thumb.

What Is 'Flow' in the Stock Market?

First, it helps to understand some terms and what they mean. Money flow in the stock market is either negative or positive in any given day. Technically, it's arrived at by averaging prices then multiplying the average by the daily volume. Do the same thing the next day and compare the resulting numbers. This will tell you whether the flow for the day was positive or negative. Did it go up or down?

A positive flow also means a given stock was purchased at a higher price, and likewise, a negative flow indicates that the next trade was made at a lower price.

These actions are also referred to as upticks and downticks. When more stocks are traded on upticks, the overall flow for the day is considered to be positive, and vice versa. 

Market Internals and What They Mean 

  • Think of it as investors voting on market direction with their money. Market internals are a group of indicators that traders use to calculate direction. These measures look at the New York Stock Exchange and Nasdaq and they measure, in one form or the other, how traders are voting with their dollars. Are they saying they think prices will rise, fall or change direction from the current trend?
  • If more money is flowing out—investors are selling—you can typically expect prices to fall.
  • A change in either of these flows indicates that the market may be ready to reverse itself.

Commonly Used Indicators

Four of the most commonly used indicators are:

Each one of these measures a form of money flowing into and out of the market in either the NYSE or Nasdaq. You'll want to follow how each is changing over time. This change is your clue about market direction.

Note: Always consult with a financial professional for the most up-to-date information and trends. This article is not investment advice and it is not intended as investment advice.