Does my advice to “follow the leaders” seem rather elementary? Well, that’s because stock market analysis is not very complex. When the market is rising with great breadth and broad participation, the trend is usually longer-lasting and more stable.
After the election in November, we witnessed some amazing rallies on strong breadth and turnover. Lately, though, some of the names that were leading the markets since the election have fallen sharply.
Stock market analysis: follow the leaders
The leaders aren’t always in great shape, by the way. As long you follow the trends and patterns, you’ll understand what’s happening in the stock market and you’ll be able to plan your trades accordingly.
Witness the banks and financial institutions that have faltered badly since the Fed raised short term interest rates. Many believed this move would help banks, but when rates on the long end of the curve headed lower, the yield curve flattened as well. And banks are not an attractive investment in that environment.
Other sectors that are faltering:
- Commodity names have been hit hard recently, as strong days are not followed up with any conviction. With crude oil getting hammered, related groups are also under distribution (selling).
- Transportations names have come under significant pressure, breaking support levels in short order.
- Homebuilders have declined sharply as a group.
Tech and biotech stocks have been safe havens, but those groups cannot push markets up forever.
How to plan for Q2
As we move into the new quarter next week, we’ll have to be mindful of which groups lead and which ones are lagging. The markets will take their cues from the leaders who participate and lead growth and expansion. If there is broad participation, we could see a move higher. If we don’t, the markets could take a pause.
Keep your eye on the trends and patterns; the markets will tell you what to do.
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