This article aims to provide insight on equity market trends as this is crucial in the formulation of investment decisions. Using market trends, investors are able to assess possible openings and threats in the market in order to make appropriate decisions.
The following is a guide to aid in the identification of equity market trends as outlined in this article.
Track Market Indices
To this end, one should track some of the most important market averages such as the Standard & Poor’s 500 Index, the Dow Jones Industrial Average, and the Nasdaq Composite. These broad indices represent general market trends and performance of the major stocks in the market.
When indices rise or fall to new levels, it is an indication of a change in trend. For instance, investors can use Yahoo Finance to access graphs that show how various indices have performed in the past.
Indices are used to make comparisons in order to assess the areas that are good or those that need improvement.
For instance, improvement in the Nasdaq might indicate a positive trend in the technology industry as it has a large number of technology firms.
The Dow could be seen as being in trouble if blue chip stocks are underperforming. To set the context, one needs to review index trends for the broader picture.
Evaluate Sector Performance
These markets are divided into 11 major sectors including IT, healthcare, finance, and others. By focusing on individual sectors, it is possible to delve deeper into the trends of the market.
Through sites like Fidelity’s Sector Snapshot tool, investors can easily determine which sectors are doing well as compared to the other. Such long-term observation of daily sector rotations could help in understanding which sectors lead the market and which sectors lag behind.
For example, during an economic recession, the investors may divert their money to defensive industries such as the health care and utility sectors rather than the energy or the consumer discretionary sectors. Knowing which sectors are contributing to overall returns is often useful in identifying trends. From the relative performance data, investors can place sector investments where strengths or weaknesses have been found.
Categorize Companies by Market Capitalization
Looking beyond industry-based categories, another helpful way of categorizing companies is based on their market capitalization, commonly referred to as market cap, which is the share price times the number of shares outstanding.
The three primary market cap segments are: There are three classifications of market capitalization, namely: small market capitalization (under $2 billion), mid market capitalization ($2 billion to $10 billion) and large market capitalization (over $10 billion).
This indicates that analyzing returns within these market cap groupings can help identify changes in investor perception.
For instance, outperformance among more speculative small cap stocks may be indicative of higher risk tolerance. Yet, the large cap leadership may suggest a “seeking safety” behavior among investors who hid in the stable large capitalization stocks.
There are various index funds and ETFs that are based on market cap weighted indices in order to create segments of the market in an effort to analyze various trends
Incorporate Technical Analysis
While assessing fundamental data gives the overall picture of the trends, technical analysis includes the analysis of price charts and the volatility of the prices
Technical analysis uses the movement of security prices to predict the support and resistance levels thus indicating when to buy or sell. Other benchmarks include the 50-day or 200-day moving average that also defines strength or weakness.
For instance, if a stock moves above its 50-day moving average after a significant decline, it is a good signal. Analyzing the trends of the moving average, in indices, sectors or market capitalization helps to use filters that are visual in nature for analysis.
Other oscillators like Relative Strength Index (RSI) also provide information on overbought or oversold levels, which is helpful in timing entry/exit signals when used with other parameters.
Evaluate Trading Volumes
On the other hand, monitoring trading volumes helps investors to gauge their commitment by finding out if price movements are associated with high or low trading activity. Strong volume enhances the validity of the emerging trends; however, low turnover exposes the lack of validation from other investors.
Potential investors can use stock screeners to view volumes of transactions within a given time frame. Comparisons between volume increases and decreases and other metrics can be used to assess the robustness of a trend.
For example, when healthcare stocks are surging and the trading volumes in the sector are increasing, it is a clear sign that there is strong sector rotation. If the boost comes with low volume, then it could point to a short-term technical rebound that lacks the necessary foundation.
The following are some of the news events and macro factors that you should incorporate.
Price of stocks depends on the expected earnings and thus, monitoring the news and macroeconomic events that can alter the expected earnings is important for the analysis of trends.
Some of the common inputs include major M&A transactions, regulatory decisions, new product launch/ catalysts, shift in management or executive team, or reaction to quarterly results in specific sectors or market capitalizations. Events can either strengthen the ongoing trends or they can pose a threat to the ongoing trends.
Macroeconomic trends such as money supply changes, inflation/ GDP numbers, geopolitics, oil prices, interest rates and exchange rates also play a significant part in determining the investor sentiment. Using news alerts through the brokerage platforms or Google notifiers, the investors are able to get the most vital information which can change the trajectory of the set narrative.
The Bottom Line
Understanding equity market trends involves checking out indices, sectors, market cap, technicalities, trading forces, volumes, triggers, and even the economy. Gathering these data helps investors to predict the headwinds, tailwinds, rotations, risks, and opportunities for the different segments.
Having a dashboard with these and other critical trends helps one gain a sense of the prevailing conditions that are helpful when making investment choices and managing risk in the portfolio.
As a result, by analyzing the market in a more analytical manner, investors can be prepared to jump onto trends and at the same time steer clear of potential negative outcomes.
The last step is perhaps the most important one as it involves turning the gathered evidence into practical measures for reaping the benefits of a well-researched equity market.
