Monday, October 15, 2007

The Importance Of Understanding Market Movements

Recently, William O'Neil (founder of Investor's Business Daily) wrote an article that appeared as a featured article for the American Association of Individual Investors. The article is titled, The Big Picture: How To Decipher What The Market Is Saying.

The article notes:
  • 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.
  • Successful investing isn't about following pundits' predictions or analysts' estimates or going by how you feel. It is about studying the market itself.
The article is broken down into four categories:
  • The Market is as the Market Does
    • Listening to opinions about the market is one of the riskiest things you can do as an individual investor. You want facts, not personal opinions. If there's one lesson most learned from the 2000 three year bear market, it's that arguing with the facts and simply hoping for the best is the easiest way to lose your shirt.
  • The Interplay of Price and Volume
    • Throughout history, the best way to determine the market's health and direction has been to view the daily price and volume action of the three major indexes: the Dow, the S&P 500 and the Nasdaq. Volume bursts in these key indexes show where mutual funds and other institutional investors, the biggest driver of stock prices, are moving. Relying on the primary market indexes and studying their daily price and volume interplay is one of the best possible methods for analyzing the market's behavior and determining its overall direction and health.
  • Market Leaders
    • Remember that history shows three out of four stocks follow market downtrends. When you see the best and the strongest stocks unraveling one after the other on heavier-than-average volume, that's telling you something about the market. Your job is not to figure out why it's happening, but to recognize that it's happening, and know what you need to do about it.
  • 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.
    • Be patient and stay objective in your market and stock analysis. 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.
The article contains a more in depth discussion of each topic. Additionally, the table below contains a summary of some of the indicators and factors to observe.

(click on table for larger image)

stock market trend indicators
The Big Picture: How to Decipher What the Market Is Saying
American Association of Individual Investors
By: William J. O'Neil

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