There are no infallible guides to stock market movements. However, that doesn't stop investors from using various measurements to try to divine the current and future direction of a stock's price or the equity markets as a whole. Here are some common methods (or metrics) for gauging the stock market.

Gauging volatility
The CBOE Volatility Index®, informally referred to as the VIX® and nicknamed "the fear index," measures real-time changes in the prices of a group of S&P 500 30-day options traded on the Chicago Board Options Exchange. When financial markets are stressed, prices of those options tend to rise as investors try to hedge any potential negative impact on their portfolios. The more concerned options traders are about potential instability, the higher the VIX tends to go; conversely, when fears subside, the VIX tends to be lower. How high is high for the VIX? During the worst of the 2008 financial crisis, it spiked to 89 at one point. Since then, it has gradually returned to more normal levels in the teens and twenties.

Fundamental metrics
Other stock market metrics rely on the nuts and bolts of corporate operations that are reflected on a company's balance sheet--so-called "fundamental data." Though based on the operations of individual companies, they also can be aggregated and averaged to suggest the state of an overall stock market index comprised of those stocks. The following represent some frequently used fundamental stock metrics.

Earnings per share (EPS): This represents the total amount earned on behalf of each share of a company's common stock (not all of which is necessarily distributed to stockholders). It is calculated by dividing the total earnings available to common stockholders by the number of shares outstanding.

Price-earnings (P/E) ratio: This represents the amount investors are willing to pay for each dollar of a company's earnings. Calculated by dividing the share price by the EPS, it can be used to gauge investor confidence in the company's future. A ratio based on projected earnings for the next 12 months is a forward P/E; one based on the previous 12 months' earnings is a trailing P/E. Like EPS, P/E is considered an indicator of how expensive or cheap a stock is.

Return on equity (ROE): This is a way to gauge how efficient a company is, especially when compared to its peers in the industry. This percentage compares a company's net income (usually for the last four quarters) to the total amount of shareholders' equity (typically, the difference between a company's total assets and its total liability).

Debt/equity ratio: Obtained by dividing a company's total liability by all shareholder equity, this percentage suggests the extent to which the company relies on borrowing to finance its growth.
Fundamental metrics based on the operations of individual companies also can be aggregated and averaged to suggest the state of an index comprised of those stocks.

Shawn Powell
Certified Financial Planner®

Contents of this article may have been entirely or partially written by Raymond James Financial Services, Inc. or Broadridge Investor Communication Solution, Inc. Information provided courtesy of Shawn Powell, Certified Financial Planner®. For more information contact your investment or tax advisor. Information has been obtained from sources considered to be reliable. Any opinions are solely those of the author and not necessarily those of Raymond James Financial Services, Inc. Article is for information purposes only and should not be considered a solicitation or recommendation. Shawn offers securities through Raymond James Financial Services, Inc. Member FINRA/SIPC. He is located at 9075 Harmony Drive, Midwest City, (405) 732-7577. Shawn can be emailed at [email protected]