How to Read a Stock Market Heatmap

Big green square, lots of small red ones. The index is up for the day and most of the stocks on the screen are down, and both of those facts are true at once, because a market heatmap gives each company space in proportion to its size and the size is what moves the index.

Read the legend first. Everything else depends on it.

Tile size and color

On most heatmaps, tile area stands for market capitalization. A company worth ten times as much as another gets ten times the space. Some tools let you switch the sizing to trading volume, dollar volume or equal weight, and the legend or a settings menu says which is active.

Color shows percent change over the selected period. Green for up, red for down, with deeper shades for bigger moves. Check the scale. One heatmap might saturate at 3%, another at 5%, and on a quiet day a scale set too wide turns the whole screen a muddy neutral while one set too narrow makes ordinary moves look dramatic.

The period is usually one day by default. Look for the selector.

Hover over a tile and most maps show the ticker, the exact percent change and often the price. Use it. Colors are grouped into bands, so two tiles in the same shade can have moved by quite different amounts, and the hover figure is the only place on the map that gives you the number itself.

Sector and industry grouping

Tiles are grouped into sector blocks, and inside each sector into industries. Read from the outside in.

Start with the sector blocks. Which are mostly green, which mostly red, and which are mixed? Then open up the industries inside them. A sector that looks flat can hide one industry up sharply and another down, which cancel out at the sector level and tell you far more than the sector color does.

Sector labels come from a classification system the tool has picked. Different systems put some companies in different sectors, so the same stock can sit in two different blocks on two different sites.

Change the period and the sizing

Switching settings is the fastest way to check whether a pattern is real.

Set the period to a week or a month and the one-day noise drops out. A sector that’s red today but green for the month is having a pullback. One that’s red on every period is in a trend.

Then switch sizing to equal weight if your tool offers it. Every stock gets the same space, so the picture shows what the typical stock did, stripped of the pull from the largest ones.

A cap-weighted map of that group would be mostly green by area. An equal-weight map would be mostly red. Both are accurate. A green heatmap can hide a narrow rally goes into what that split means.

What a heatmap cannot show

Breadth by count is the first gap. Area tells you where the money moved; it won’t tell you how many stocks rose. Some tools print an advance and decline count beside the map. If yours doesn’t, the equal-weight view is the closest substitute.

Volume is the second. A tile up 4% on a sliver of normal trading and one up 4% on three times normal look identical. Volume bars on the chart show the difference.

Then there’s the reason. Color says a stock moved. It says nothing about earnings, a downgrade, a sector-wide rate move or a single large order. That takes the news, the filings, or at least the quote page.

Use it to find where to look

The map is good at one job: picking what to look at next.

Pick the tiles that stand apart from their neighbors: a red stock in a green industry, or a small company with a deep color while the rest of its group is pale. Those moves are about the company. Open the chart, read the quote page field by field, and compare the stock with its group, which is the method laid out in how to compare a stock to its sector.

Moves shared by a whole block usually come from outside the company, such as rates, commodity prices or a sector-wide report. Treat them as one story.

What goes wrong

• Reading the color of the whole screen as the direction of the typical stock.
• Missing that the scale saturates, so a 3% move and an 8% move share a shade.
• Forgetting which period is selected.
• Acting on a tile without opening its chart, when the map has only told you that something happened and has nothing to say about what it was or whether it will last.