A simple technique to find whether stocks are cheap or dear is to measure the number of stocks selling above or below their 200-day moving averages. This indicator cannot forecast what stocks are likely to do. However it can tell the investor as to where he or she is at any point. Most investors do not even know where they are, much less where they are going.
Using the 200-day moving average indicator:
- If 70-80% of the stocks are trading above their 200-day moving averages, they are not cheap.
- If 70-80% of the stocks are trading below their 200-day moving averages, they are not dear.
- If 40- 70% stocks of the stocks are trading below their 200 day moving averages, the market is in a neutral zone. Buying can be considered.
This is shown in the figure below: