The stock market is always changing. That’s especially true at times like the present, when investors are finding opportunities in new companies or returning to long-abandoned sectors.
This post will help traders keep up with shifts in sentiment. It will describe some basic techniques for discovering new areas of leadership at almost any time. These can also help you avoid falling into value traps, or being late to stocks that are losing buyers.
Here are some basic ways to stay on top of investor sentiment in any stock market:
- Tracking sectors with ETFs
- Watching stocks at new highs
- Looking outside traditional indexes
- Paying attention to time frames.
Tracking Sectors With ETFs
Exchange-traded funds (ETFs) are baskets of stocks, bonds and commodities based around certain themes. Investors can use their performances over time to judge relative strength in the market. While hundreds of ETFs are now available, this handful covers most of the market in most circumstances.
“Risk on” Cyclical Sectors: These express optimism about the economy.
- Russell 2000 Small Cap ETF (IWM)
- SPDR Industrial ETF (XLI)
- SPDR Financial ETF (XLF)
- SPDR Energy ETF (XLE)
“Risk on” Growth Sectors: These benefit from innovation and don’t require a strong economy.
- SPDR Technology ETF (XLK)
- Invesco QQQ Trust (QQQ)
- Market Vectors Semiconductor ETF (SMH)
“Risk-on” Global: These benefit from a strong international economy and/or weak U.S. Dollar.
- iShares MSCI Emerging Market ETF (EEM)
Safe Havens: These generally do better when people are fearful. They can struggle when the economy is strong.
- Market Vectors Gold Miners (GDX)
- iShares 20+ Year Bond ETF (TLT)
- SPDR Consumer Staples (XLP)
- SPDR Utilities (XLU)
Watching Stocks At New Highs
Another simple, but often effective, technique is to monitor stocks hitting new highs. This can show where new money is being put to work.
Looking Outside of Traditional Indexes
The stock market is currently going through a time of historic change. Long-established industries like energy, financials and retailers have lost prominence. Investors are also shifting toward new businesses like electric cars, cloud computing and online market places.
This creates challenges because new stocks may not be included yet in major indexes like the S&P 500 or Nasdaq-100. Investors can overcome this obstacle by scanning for stocks and excluding index membership. For example, you can:
- Include all stocks listed on the Nasdaq.
- Exclude members of the Nasdaq-100. TradeStation Symbol Lists -> Index Components -> Nasdaq Indexes -> Nasdaq 100.
Paying Attention to Time Frames
The stock market often pivots around key events or simple periods on the calendar.
For example, notice how the Nasdaq-100 recently peaked at the start of September and struggled for next few months. Also notice how General Electric (GE) started its long-term decline at the very beginning of 2017. The Nasdaq-100 also broke out at exactly the same time, while the Russell 2000 stalled.
Some of these intervals are obvious: months, quarters or years. Others may follow an election or Federal Reserve meeting. Or there could be a one-off event like the November 9 breakthrough on the coronavirus vaccine. That revived interest in reopening plays like energy, travel and financial services.
While time frames can be important, traders should never assume they will matter. When you study the market using the methods listed above, you may notice certain patterns are happening over specific time frames. These can be useful signs of investor rotation that can help you assess what’s happening in the market.
This article was written by David Russell, TradeStation Securities, Inc., part of the Monex Group Inc, published on 02/12/2020.
David Russell is VP of Market Intelligence at TradeStation Group. Drawing on nearly two decades of experience as a financial journalist and analyst, his background includes equities, emerging markets, fixed-income and derivatives. He previously worked at Bloomberg News, CNBC and E*TRADE Financial. Russell systematically reviews countless global financial headlines and indicators in search of broad tradable trends that present opportunities repeatedly over time. Customers can expect him to keep them appraised of sector leadership, relative strength and the big stories – especially those overlooked by other commentators. He’s also a big fan of generating leverage with options to limit capital at risk.