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Technical Analysis, Studies, Indicators:

Performance Index (PI)


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Description: technical analysis of stocks charts, comparing stocks' performance to the benchmark indexes.

Description

The Performance Index (PI) is used in technical analysis to compare a stock's price trend to the general trend of a benchmark index. Traditionally, NYSE Composite Index (^NYA) is used as a benchmark index, however, the S&P 500 (^SPX) also considered as a good barometer of the market sentiment.

Technical Analysis

Technical analysis uses the Performance Index mostly to select stocks that move along its benchmark index. Many traders prefer trading stocks and ETFs which move along with the market as it makes the process of technical analysis somewhat easier. When you know that your stocks in general moves with the market you may build your trading strategy accordingly. As an example, if a stocks has a correctional move down during the bullish market and this stock usually follows the market trend, a trader may anticipate only shallow correction.

Fundamental analysis also uses the Performance index as a stocks selection tools to select the stocks with good performance.

When analyzing the Performance Index you should know that

  • PI readings = 1 would reveal that analyzed stock has the same performance as index - you may expect the same profit no matter whether you invest into this stock or the benchmark index;;
  • PI above 1 would state that analyzed index outperforms this index - you may expect to receive higher profit by investing into this stock than into the index;
  • PI below 1 indicates that the analyzed stock underperforms the benchmark index - if you invest into this stock during the bullish market you may achieve smaller profit than if you would invest into the index;
  • Flat PI readings would indicate that analyzed stock moves along the benchmark index with the same acceleration;
  • Declining PI readings would indicate that analyzed stock is in stronger than index decline or the stock is in decline during the index's up-move;
  • Advancing PI reading would indicate that analyzed stock moves up and this up-move is stronger than index's up-trend (or index is declining).

On the chart below you may see an example of the Performance Index used to measure the performance of the AAPL stock in relation to the NASDAQ 100 index (^NDX). The interesting thing is the the AAPL Performance Index reversed up right before the AAPL started to recover. This is another aspect that could be used in technical analysis - when the PI reversed up after a strong decline when stock is in strong decline it indicates that this stock starts to outperform the benchmark index and it could be a signal of the possibility of reversal up in the near future.

Chart 1: AAPL stock and Nasdaq 100 index chart - Performance Index

AAPL stock chart - Technical Analysis - PI - Performance Index

Formula and Calculations

Performance index is calculated by comparing the price of a security the to price of a benchmark index or other security:

PI = Stock Close / (Index Close) x (Index MA / Stock MA)

Victor Kalitowski

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