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Stock market trends help investors to determine what type of stocks to buy, sell, or hold during a bull market or in a bear market. Any upward or downward fluctuation in the economy can typically be traced back to major economic factors, including inflation, interest rates, and global oil prices. Knowing and understanding stock market trends will help you maximize your profits and improve your future earnings growth.

Stock Market Trends: An Overview

“Birds of a feather flock together” – proverb

The concept works with people – you are likely to become the average of your five best friends.

And it’s true on stock market trends and Wall St., too.

Outlier stocks move to the beat of their own drum (Apple, Tesla, etc.), but they are the exception, not the rule. Despite the intense competition that takes place in corporate America, most companies are closely correlated with their peers. If biotech stocks are doing well, all the major players will do well. If railroads are playing a leadership role, most railroad stocks will participate to some degree or another.

Research has shown that about 25% of a stock’s movement is replicated in the overall movements of the group to which it belongs. Strong group = high odds a stock from the group will be strong.

Essentially, stock market trends can always be treated as your friend. Except here we’re talking about the strength/weakness of a stock’s peers, not the overall market.

My powerful stock setup isn’t a setup per se; it’s a concept or form of investment advice. Money rotates around the market. Groups run hot and cold. They come into and fall out of favor. At any given time, you are better off trading stocks that come from leading groups instead of random charts, regardless of how good the charts look.

Investment Strategies That Exploit Stock Market Trends

When I started trading in 1999, I looked for, and traded, the best charts I could find. However, I traded in a vacuum. I paid no attention to anything else that was going on. I just wanted to trade the best looking charts and the current market.

Over time, after taking diligent notes on all my trades, I realized there were some similarities between my winners and losers. More often than not, my winning trades tended to come from groups that were doing well, while my losers tended to be great-looking outlier stocks that didn’t have the same peer confirmation.

This was a breakthrough realization. Instead of simply trading the best stocks I could find, one of my key criteria became: Trade great stocks that come from great groups.

Here’s an example.

On Aug 7, XHB, a residential construction ETF, broke out to a new high and started a new uptrend.

Group Strength: A Force Not To Be Ignored in Stock Market Trends | graph 1

Seven trading days later, Toll Brothers (TOL) broke out and rallied better than 20%.

Group Strength: A Force Not To Be Ignored in Stock Market Trends | graph 2

Two weeks later, KB Home (KBH) broke out and continued its uptrend and rallied over 50%.

Group Strength: A Force Not To Be Ignored in Stock Market Trends | graph 3

The next day, Pulte (PHM) traded out of a consolidation pattern and continued its uptrend.

Group Strength: A Force Not To Be Ignored in Stock Market Trends | graph 4

Two trading days later, Horton (DHI) broke out of a consolidation pattern and rallied about 15%.

Group Strength: A Force Not To Be Ignored in Stock Market Trends | graph 5

The same day, Lennar (LEN) broke out and rallied about 15%.

Group Strength: A Force Not To Be Ignored in Stock Market Trends | graph 6

On their own, these stocks would not have done nearly as well. But, as a group, since money was flowing in, they all did great. If you spot a stock that is doing well, your first reaction should be to ask: What other stocks in the group are setting up?

Why Do Stocks Tend To Move Together?

Although stocks are in brute-force competition with each other, they all benefit from the same underlying forces, and no company will ever come close to getting 100% market share. If cheap gas results in people buying SUVs, all SUV manufacturers will benefit. A high oil price, on the other hand, will prompt investment in solar, and all solar companies will start to do better. Likewise, if consumer spending is ticking up—for whatever reason—most retail stocks will trend up. It’s relatively rare for Nike to do well while Under Armour doesn’t or for Visa and MasterCard to move in opposing directions.

Stocks move in groups, so when you notice an upward stock market trend, you should immediately be on the lookout for the other stocks in the same group that are also doing well.

Here’s another example. The solar group was showing signs of life. The group had already rallied a bunch of it’s low and was set up for another leg up.

On April 7, SunPower (SPWR) broke out and more than doubled over the following month.

Group Strength: A Force Not To Be Ignored in Stock Market Trends | graph 7

Two weeks and three days later, Canadian Solar (CSIQ) broke out an almost doubled.

Group Strength: A Force Not To Be Ignored in Stock Market Trends | graph 8

The same day, SolarCity (SCTY), which was already in a steady uptrend, jumped on high volume and also doubled.

Group Strength: A Force Not To Be Ignored in Stock Market Trends | graph 9

The next day, SunEdison (SUNE), broke out from a three-month consolidation pattern and rallied forcefully.

Group Strength: A Force Not To Be Ignored in Stock Market Trends | graph 10

Again, by themselves, the gains wouldn’t have nearly been as good. However, since the underlying theme at the time had money rotating into the solar group, these stocks all did great.

These are not short-lived or fly-by-night situations. Themes, or stories, tend to last many months, possibly upwards of a year. If a group is hot, there’s probably an underlying story that investors are slowly catching onto, and the strength in the group is likely to last a long time; definitely much longer than that associated with a quick trade.

Not all stocks within a group will be tradable. Some won’t trade smoothly. Others won’t have enough liquidity. Others may move too slowly and, therefore, would not be good candidates. Others still may be too far gone, so the risk/reward won’t be very favorable. But there are usually a handful of smooth-moving, high-volume stocks that can be culled from the list.

Besides increasing the odds of executing a profitable trade when it comes from a leading group, the practice is a big time saver. After all, instead of starting with the entire universe of tradable stocks, why not start with a small handful of groups that are performing the best?

One more example before I give you some great insider tips on how to identify the strongest groups.

Crude oil was bouncing around in the 90s and 100s, so oil stocks were hot. On February 5, Athlon Energy (ATHL) broke out and began a move that didn’t end until well into the summer (with a six-week pause in the middle).

Group Strength: A Force Not To Be Ignored in Stock Market Trends | graph 11

The next day, Diamondback Energy (FANG) completed a double bottom pattern by trading through resistance with a solid block of volume. The stock rallied 50% in under three months.

Group Strength: A Force Not To Be Ignored in Stock Market Trends | graph 12

Three weeks and three days later, Callon Petroleum (CPE) broke out from a large consolidation pattern, tested the former resistance level, and then rallied into the summer.

Group Strength: A Force Not To Be Ignored in Stock Market Trends | graph 13

Three weeks and a day after that, Concho Resources (CXO) broke out from a one-month consolidation pattern and ground its way higher.

Group Strength: A Force Not To Be Ignored in Stock Market Trends | graph 14

Stocks move in groups. When a group starts to move, don’t look at the entire universe of stocks and pull out the best opportunities. Start with the best-performing groups. Then pull out the best charts.

How To Spot What’s Leading?

Identifying the best-performing groups at any given time is not rocket science.  Here are a few ideas.

1) Pay attention. At the end of the day, get a list of leading and lagging groups. When you notice the same groups appearing on the list, take note and look inside those groups.

I have 159 sectors in a watch list in stockcharts.com. At the end of the day, I glance at the list, sorted by performance, to see what’s leading and what’s lagging. Here’s a snapshot of what I may see on any given day.

Group Strength: A Force Not To Be Ignored in Stock Market Trends | image 16

Don’t have a subscription to stockcharts.com? No problem. There are free online sources. BigCharts.com ranks sectors and allows users to see performance for the last week, month, two months, etc. Here’s a snapshot.

Group Strength: A Force Not To Be Ignored in Stock Market Trends | image 17

Barchart.com also ranks stocks per their own criteria. I find it a great starting point. Here’s a snapshot. And by the way, the great thing about these online sources is you can click on the group names and get a list of stocks within the groups.

Group Strength: A Force Not To Be Ignored in Stock Market Trends | image 18

2) Scroll through the market’s top-volume stocks and pull out the best looking charts. Then dig deeper into the groups that are most prevalent on your list. For example, if you scan the Russell 3000 and notice that numerous semiconductor stocks look very good, delve deeper into the group. There are probably other stocks worth investing in.

Barchart.com has a list of Top 100 Stocks. Some aren’t tradable because they’re too cheap or lack volume, but many are. Check out the list once per week.

3) Look at the relative strength charts. These are charts that compare a group to the broader market. A quick glance will reveal which groups are out-performing. This doesn’t guarantee a group is doing well; it only means the group is doing better than the market. At the very least, it’s a starting point. Here’s an example. It’s the aerospace index charted vs. the S&P 500. The group under-performed last summer, out-performed December-February, and is now under-performing.

Group Strength: A Force Not To Be Ignored in Stock Market Trends | image 19

4) Apply your stock trading indicators to group charts. If you like to buy stocks for which MACD is starting to curl up from an oversold level, use that same indicator on the group charts, and then look inside the groups that meet the requirement.

You can be creative. The goal is to simply narrow the universe of groups to a small, workable number and then look inside those groups for trading/investing ideas.

Conclusion

Understanding stock market trends can be very helpful as it will enable you to spot which stocks are going up or down. You can use the aforementioned techniques to increase your chances of performing successful trades and investments. Learn how to apply them in your analysis and positive results will follow. It’s simple. Instead of playing great-looking charts, play great-looking charts from leading groups.

THE MOVIE

Here’s a video where I discuss the above concept, along with a few others:

 

If you want more information about the stock market trends, read more articles here.