I asked a question on StockTwits and Twitter this evening that went something along the lines of this – “To what degree do the $SPY’s action influence your willingness to take a trade?” At the core all this question was really asking was “Do you believe it is a stock market or a market of stocks?” I had a couple very intelligent traders respond (one’s that I respect very much and speak often with), and we came to the conclusion that this is ultimately a market of stocks. This is not a hard conclusion to come by, it makes sense if you know the definition of what $SPY ($SPX) truly is. The question I have often struggled with and ran into is how you approach this belief in your trading, I will do my best to address this here.
Why choose to have market of stocks approach? Well for one reason it opens the door to trade alot of stocks versus just when the indexes happen to line up as well. As a trader that has a business to run and to run that business they need to be able to place trades, approaching the market from an individual stock specific type of way is essential to having a successful career I will say though that often time when the best set ups are happening the indexes are also likely to be setting up.
Another reason why I believe having a market of stocks approach is that a market goes through periods of rotation. Being able to identify and participate in this rotation is essential in trading. The only way to really do this is to look at each sector/stock independently but then of course measure the relative strength of it versus the $SPX to truly see if there is rotation occurring. A recent example of this is the rotation we saw into the oil names, and out of the biotechs. Now back into the biotechs and out of the oil. The sector rotation is just a part of the game, being able to recognize relative strength is vital as that is likely the sector/stock that will see rotation.
I write this article to mostly express my thoughts on the subject because to be honest, in the past, I have treated it more like a Stock Market versus the market of stocks. Just something I will need to get used to and work on. Do you know what you need to work on?
Have a good evening. Would love to hear your thoughts on the subject. Shoot me an email or Tweet me, or of course comment.