Stock Trading and Other Things

How does knowing the direction of the stock market help you at all?

Let's say the direction if the S&P 500 is moving upwards. So what? Does that mean it's a good sign to buy a stock?

But aren't stocks all affected by individual factors; like maybe one stock is getting sued and that stock is going to drop. Even if you know the direction of the stock market, the stocks themselves are subject to a bunch of factors. So how does knowing the direction of any stock market, DOW, Nasdaq S&P help you at all?

Public Comments

1. You are right, each stock is an individual and needs to be analysed either technically or fundamentally or both depending on your investment strategy. The answer isn't as simple as you make it sound. Sectors are important, even though you have a stock when the market is trending up, you could be in a sector that is bearish. MOST stocks flow with the market, if the market is trending down, most stocks get swept down with the market, especially in major corrections. Same with a major rally, most stocks get swept up with the rally. When the market tumbles, there are generally more sellers than buyers, likewise, when the market is strong, there a a lot of buyers, and they automatically drive your stock up.

2. First off, virtually every stock has a positive correlation with the market. On almost all stock information pages on the web, you will see something that says 'beta'. If the beta is positive, that means the stock has a positive correlation to the market index. Almost all stocks have positive betas. That means that if someone told you the S&P was going up, your best bet on nearly every stock is that the individual stock is going up too (beta would give you the right guess on how much it is going up if you knew how much the index was going up).

Second, (and this is the key to diversification) if you own a decent size portfolio of 30 or 50 stocks balanced somewhat like the index all those individual factors wash out and you start getting something more and more like the index performance. That means that the index doesn't help you that much on the individual stock level, but it will help a lot on the portfolio level.

Beyond that, all those indexes are highly correlated so if you told me that the Dow was going up would I like to own GOOG, the answer is sure even though Google is not part of the Dow.

In investing, there are rarely sure things but there are often decent correlations and high probability bets. Betting on individual stocks when you know that stocks collectively are going up is a high probability bet and you should take it.

Now knowing when the market is going up is a whole different issue...

3. Good question.

I come at stock trading and investing seeking to have the most probabilities for success in my favor. Knowing and trading into the general market direction creates a higher probability for a gain. Because that's what we're all trying to do in the stock market - is find a way to invest successfully.

As already mentioned, it's easier to swim with the tide than against it.

The link below talks about the various probability factors.

4. The stock market tends to over react to situations meaning when times are good it goes too high, when times are bad it goes too low, when it gets too high you get a bubble meaning that the economy can't sustain the fairy tail of growth that qualitative analysts have predicted. Then the bubble bursts like in 2000.

Likewise when stocks plummet they aren't going to hit rock bottom, because companies are still worth money. That's when the market bounces back up when people realize that there's actual value behind a stock rather than just a ticker symbol and an arrow.

When someone says that the market is "going" up that's implying that they can predict the future. It's more accurate to say that the market WENT up today, we'll see about tomoro.

If you can calculate intrinsic value then you can better tell the value of a company and whether it's valued above or below its market price.

5. It has to do with knowing how to ready price and pattern in the market. Price and patterns pay in my humble opinion. I have been trading the market for a long time, probably when you were in your diapers.

You should be using technical analysis and indicators to back up your claims, there are no holy grail to trading, but you can definaltly put the odds in your favour if you know what you are doing.