Disparity Index of 110: What Does It Say About Price?
Calculate the disparity index as the ratio of price to its moving average. Distinguish 100-based and zero-based displays, and see how sideways prices alone can narrow the gap.
A disparity index displayed around a baseline of 100 equals the current price divided by a moving average, multiplied by 100. A reading of 110 means price is 10% above that average, not 10% above business value. Read it alongside the average’s period and direction of change.
A 100-based index versus a zero-based percentage deviation
With price÷average×100, the reading is 100 when price equals the average. A percentage deviation calculated as (price÷average−1)×100 is 0 in the same situation. Since 110 and +10% can describe the same distance, check the formula before copying numbers from a screen. Distance from a 20-day average and distance from a 60-day average use different reference points. If you change the period or averaging method when comparing a stock’s disparity index, it becomes difficult to separate market changes from setting changes.
There is more than one path toward the average
A shrinking gap does not only mean price has fallen toward the average. If price moves sideways while old low prices leave the calculation and the average rises, the gap also narrows. The ratio can fall even if both price and the average rise, provided the average rises faster. Do not immediately translate a shrinking disparity index into a price correction or bearish signal. Keeping the numerator, price, the denominator, the average, and the ratio in three separate fields makes the cause of the change directly visible.
Compare the usual range alongside the trend
Whether a disparity reading is unusual depends on the stock’s volatility characteristics and the observation period. Applying trading thresholds from a guide uniformly to all companies can overlook situations where strong trends persist. Even if price rebounded at a particular level in the past, examine all instances of that level. For a stock facing a major change in business conditions, the historical average itself may not explain current value. Using disparity as a measure of distance from an average and keeping it separate from valuation data respects the measure’s scope. Read the path price took as the gap narrowed alongside the narrowing itself.
Worked example
Hypothetical example: With a current price of 110 won and a 20-day average of 100 won, the disparity index is 110. If price stays at 110 won while the average rises to 105 won, the index becomes 110÷105×100, or about 104.76. The index fell by 5.24 points, but the price return was 0%. This illustrates the difference between assuming price will fall to the original average of 100 won and the average moving closer to price.
What to check
- Check the formula to determine whether the baseline is 100 or 0.
- Specify the averaging period and whether the method is simple or exponential.
- Separate price and average effects when explaining a ratio change.
- Do not describe the disparity index as a percentage overvaluation relative to fair value.
Sources and primary materials
This is educational material about research methods. For an actual company decision, verify the filings and primary sources for the relevant period.