Leaders And Downtrends

When a severe correction hits the market, the biggest leaders tend to drop the most. For one, they have the most gains to lose. Many of the strongest stocks that drove the Nasdaq to a peak of 5132 in March of 2000 fell 90% below their highs. While the major averages were selling off in heavier volume, leading stocks were simultaneously breaking down, a clear sign some institutions were selling and the market was turning south. After a long market advance, you can be fairly sure it's headed for trouble if most of the market's stock leaders start acting abnormally. Our studies over the last 50 years show that when a market leader finally tops, on average, it will decline 75%. That's why you, as a serious investor, must have a simple, proven method to recognize a topping market and take defensive action.

What To Do Today

Track the averages and watch the behavior of the better-quality growth stocks with excellent institutional sponsorship, and you should be able to stay in phase with the market.

A few facts to keep in mind-

-The economy is improving as a result of the broad-based tax cuts,

-Companies have cut costs during the 2000 three-year bear market and are still lean and efficient,

-Consumers have paid down their installment debts over the past few years and continue to benefit from low interest rates.

As with most things, be patient and stay objective in your market and stock analyses. Don't let anyone's opinions or predictions blind you to the facts. Keep your emotions from getting in the way of sound decisions, and keep to the facts:

-Monitor the charts of the three major averages the Nasdaq, the S&P 500, and the Dow for unusual price and volume behavior.

- Compare the behavior of the averages to the behavior of the big market winners:

Are they finding support at their 50-day moving average? Are they breaking down badly and not rallying well? In doing these things, you build a stronger level of understanding market behavior as it happens. You'll learn to recognize the signs that should give you a solid plan of attack-one that relies on the most relevant market facts. Remember, personal opinions can frequently be wrong, whereas markets seldom are.

To be a successful investor, you can't just buy a good stock. You have to buy the very best stocks at the very best time. And it's not enough for you to simply study the stock itself, you also need to analyze the market conditions in which it is trading.

Five decades of historical studies on past market cycles show that three out of four stocks decline when the general market averages correct. That's why market direction is one of the several critical factors in making money in stocks. How do you tell which way the market is headed?

You really don't need a crystal ball. The key is learning to decipher the day-to-day market action in other words, what the market's doing right now. Successful investing isn't about following pundits' predictions or analysts' estimates or going by how you feel. It is about studying the market itself. There are a few key market indicators to look for that provide a trustworthy lens into how the market is behaving overall. In this article, we'll focus on the main indicators the Nasdaq composite, S&P 500 and Dow Jones industrials.

Author's Bio: 

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