Nowadays, you have to go beyond the pure technical line of attack, since the environment is one where individual stocks rise and fall together with the broader markets and neither provides a close inspection of the balance sheets of individual companies.
Today it is crucial to analyze major market indices to make sure that you are investing along the market trends, otherwise you will be taken aback by a market that’s looking at the bigger picture.
Basically, there are 4 things that an investor must look into before buying or selling a stock to make sure he has the winning hand in the current market environment:
1. Is the market trending or caught up in a trading range?
It is a lot easier to profit from trending markets. If you are in such a market, let your winners run.
A trading range is kind of spiky. In this case, you must take profits quicker and, if you decide to buy at all, buy smaller size positions, because your stocks will be very vulnerable to moving up or down due to irrelevant market noise.
2. What’s up with the dollar?
The dollar is an important leading aspect in markets focused on macro affairs. Today, a weaker dollar means stocks are stronger, but a stronger dollar weakens stocks.
In many instances, the dollar leads the market, getting weaker when stocks are about to get stronger.
3. How are market leaders doing?
One of the best ways to sense the market is through the leading stocks.
Market leadership has a tendency to rotate; nevertheless you can see where the leadership is by observing stocks that are attracting uncommonly large trading volume and the ones that have recently and steadily been making new highs or new lows.
If the market trending is up and leadership stocks are doing well, you can assume the market is healthy.
If leadership stocks begin to holdup, it is time to get cautious. Tighten up stops, trade smaller positions, or move to cash.
4. Review balance sheets
After identifying the trend and making sure the market is healthy, you must look for companies with true potential.
Ask yourself these questions:
Is this company making money?
Does the company have a good sales growth forecast?
Is its case for future growth rational and realistic?
In many cases, a company’s stock price rises with the rising trends; however if it is not rising on its own growth potential too and if it is overrated based on current earnings, once the markets corrects, sellers will probably hit the weak links first and very hard.
So, do your homework and avoid serious trouble when the going gets tough.
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