Knowledge Center

How to Read the Prospect List Grids

Quick summary grids are an integral part of the Daily Report. We've received a couple of questions about their contents so we thought we'd devote some electronic ink to the subject.

Here are the grids from the Daily Report:

This one is pretty self-explanatory. It goes through and details the performance of the major market averages for the previous trading day.

This shows the number of stocks closing the day with a gain over the previous day's close (advancers) and stocks closing lower than the previous day's close (decliners) for the two major exchanges. It also shows how many stocks reached new 52-week high prices and new 52-week low prices.

These so-called "market internals" are important for a couple of reasons: First, they are important because they are good indications of the strength of the overall market. The Dow Jones Industrial Average is only 30 stocks and can therefore have its results skewed by a couple big gainers or losers. Even though the NASDAQ composite accounts for all NASDAQ listings, it is dominated by the market caps of its 100 largest stocks, also providing the potential to mask the health of the entire market. By glancing at the market internals, you can tell whether the number of advancers, decliners, or new 52-week benchmarks confirm the direction the major market averages indicate.

The second reason they are important is they are widely followed by market professionals. These people consider the market internals to be a sort of "temperature" of the market and many fundamental and technical analysts trade directly off these numbers. If you hear Bob Pisani or someone else on CNBC talking about the "Advance/Decline Line" or the "A/D Line", they are talking about numbers based off the information in this grid. These numbers are an important part of market psychology.

It is often helpful to get an idea of what market sectors are doing well and what market sectors are doing badly. Most sites track index products like the Philadelphia Semiconductor Index (otherwise knows as "the SOX" for its identifier symbol). Sophisticated investors do trade those index products, but they are beyond the abilities of most individual investors.

Because of this, we use a set of 332 "tradable sector securities". These "stocks" have been put together by firms like Barclay's and Merrill Lynch. They are otherwise known as "Exchange Traded Funds" (ETFs) and are nothing more than a set basket of stocks in a particular market sector that trade under one ticker symbol. Unlike the index products, these trade exactly like any other stock

By using these securities, even individual investors can take advantage of sector-wide moves. Even though a number of market professional are NymbleInvestor.com Subscribers, independent investors concern us the most. Listing the market sectors in this manner makes more sense to us.

We should note these sector securities can move rapidly and some of the vendors have horribly overweighed just a few of the stocks in the sector basket. If you are going to make an investment in one of these sector securities, follow the link at the bottom of the grid and get more information -- including the prospectus from the vendor -- before committing your hard-earned capital.

The last grid on the Daily Report deals with the two most influential index futures -- the NASDAQ-100 and S&P-500 futures. At a glance you can see what the market sentiment was at the close of the market the previous day. You can also use the information to better interpret the futures information posted in the lower corner of the screen during CNBC's pre-opening market coverage. We'll discuss this with the S&P-500 futures line, but it applies to the NASDAQ-100 futures line as well.

The first number is where the S&P Futures closed during the regular day session. The second number is what is termed the Fair Value of the S&P Futures contract. To explain this, we're going to have to digress for a moment...

The S&P Futures are an option contract. Sophisticated traders make bets on where the S&P-500 will close at some point in a month or so in the future. The Fair Value number is the actuarial present value, calculated with an appropriate discount for time value and interest rates. This accounting "trick" provides traders a way to compare the cost of their option purchase with the current real "cash" value of the actual S&P-500 index.  OK, back to the grid...

You can tell what the market sentiment was at the close of the previous day's trading by comparing the "Yesterday Close" and "Fair Value" numbers.  If the futures closed above the Fair Value number, the sentiment was bullish.  If the futures closed below the Fair Value number, the sentiment was bearish. Absent any major news before the next trading day, this sentiment indicator is often an excellent predictor of how the market will open.

S&P Futures trade around the clock except for a couple of short rests around the opening and closing of the American markets. The "After Hours" number is a snapshot of the current price quote for the S&P Futures, We take this snapshot just before we publish each Daily Report to the NymbleInvestor.com web site. The "As Of Time" lets you know when that quote was taken. It appears in military time for the east coast time zone.

The after hours number is also an indicator of market sentiment. The difference between the after hours number, Fair Value and the previous close numbers are all significant. If the after hours quote is higher than the Fair Value number, then the market sentiment is bullish. If the after hours number is lower, then a correspondingly bearish sentiment is present. The color-coded "Difference From Fair Value" number gives you an instant representation of this sentiment.

We said that all of this can help you interpret the S&P Futures number appearing on the screen during CNBC's morning broadcast. The graphic containing the number is called a "bug" in the terminology of TV broadcasters.  Buckle your seatbelts here for a moment because this gets a little obtuse. Part of the problem is that we signal bullishness and bearishness in a, we feel, much simpler fashion. We understand why they do it their way. However, without knowing the Fair Value number you cannot really interpret their number as bullish or bearish simply by looking at it. We have chosen to make our table in a fashion where sentiment can be seen at a glance.If the difference number is green, it's bullish. If it is red, it's bearish.

Given the above set of numbers, the bug on the CNBC screen will read +6.00. Just because the number is positive, does not mean the market is "bullish". In this case, however, it is bullish because the bug number added to yesterday's close is above the Fair Value number. Mark Haines, or someone else on CNBC, will say: "The futures are currently up $6 which is five points above fair value, indicating a positive bias at the open."

This set of numbers is pretty obviously bearish. The bug on the CNBC screen will read -11.00. Because the bug number added to yesterday's close is below the Fair Value number, the market will be bearish. Mark Haines, or someone, will say: "The futures are currently down eleven, but only one point below fair value, indicating a slightly negative bias at the open." You should note the negative bias in this example is far less than the "-11.00" flashing on the CNBC screen might suggest.

Here's the tough one... The bug on the CNBC screen will read +3.00. The fact that is positive might suggest to you the market is bullish. However, because the bug number added to yesterday's close is below the Fair Value number, the market will actually be bearish. Mark Haines, or someone, will say: "The futures are currently up three, but still two points under fair value indicating a negative bias at the open." By looking at the CNBC bug and seeing the positive number, you might think the market will be bullish at the open. In fact, just the opposite is true.  See why we like our math better? One glance at our grid and you know from just the color of the "Difference" number where the sentiment is.

So why look at the CNBC bug? Unfortunately, our grid data is not updated in real time. Between the time we put the Prospect List to bed for the night and when you start watching CNBC in the morning the market can and will change character. The grid gives you the basic information necessary to look at the bug and figure out the sentiment by yourself without having to depend on Mr. Haines' to translate it for you.

Here's the distillation of the process you'll go through to translate the CNBC bug. The "S&P Futures Yesterday Close" and "Fair Value" number both come from the Prospect List grid...

If (S&P Futures Yesterday Close + CNBC Bug Number) is greater than the Fair Value number, then it's bullish.

If (S&P Futures Yesterday Close + CNBC Bug Number) is less than the Fair Value number, then it's bearish.

That's it for the grids appearing on the Daily Report. We hope this educational piece has been worth the time you've taken to read it.