As we transition back and forth from bear to bull markets, we must be cognizant of the different styles of trading to be successful. We are once again in a stock picker’s market. Here’s how to tell.
A stock market versus a market of stocks
In a bear market, three of four stocks go down. The one that doesn’t go down may not even go up; it may just move sideways. Hence, we are at a disadvantage and need to figure out how to break even or make a bit of money.
We call this a “stock market.” In this environment, stocks flow with the momentum of the indices regardless of individual stock news or performance. To survive, you need to let go of stocks quickly and hold a lot of cash. It’s a completely emotional response, but it can create nice opportunities. When the tide moves in and out the waves are strong and takes everything with it.
In a bull market, most stocks go up. However, it happens at a much slower pace than when stocks are falling in a bear market. As the saying goes, a market going up is taking the escalator and one going down is taking the window.
A bull market is a “market of stocks,” aka, a stock picker’s market. We can use charting and technical analysis to gain an edge and trade a stock that defies the market.
Why I love a stock picker’s market
I like to trade in this type of environment especially when trading options. If I am reading the chart correctly and momentum is strong, then picking stocks becomes a more profitable venture. It doesn’t work every time of course, but I would rather not be punished by a market swoon that sweeps up the good and bad. My preference is to pick a stock, take a position, and let it play without market interference.
Further, a stock picker’s market often happens when broad rallies ensue, giving us more opportunities across many more names.
How do we know if we’re in a stock picker’s market? Some stocks go up, others go down, and others go sideways. In other words, stocks are trading on their own merits and not moving along with the indices. Bottom line: it’s a better and more efficient way to trade.
