Stock Trends and How to Spot Them

With spotting stock trends it is important to distinguish between individual stock trends and stock market (index) trends.

Individual stock trends that are upward moving do not necessarily foretell stock market advances. However, stock market trends that are moving upward do most often precede increases of individual stocks. In fact there is a mathematical relationship (Dr. Benjamin F. King, 1964, University of Chicago) which states that 86% of individual stock price volatility can be explained by directional trends of the overall stock market. For an investor who can determine if the market trend is up, a great portion of their financial market risk can be significantly reduced. Thus, spotting stock trends is essential to having a successful investment methodology.

Luthman Financial Management (LFM) constantly reviews market and individual stock indicators (graphically expressed mathematical equations that illustrate the direction of an individual stock and stock market). These indicators help to determine when a trend is about to begin (opportunity to make gains) or end (opportunity to avoid losses). Either way, it is a win!

Both overall market and individual stock indicators fall into 2 broad classes:

• Leading indicators – that focus on trends that are about to reverse
• Lagging indicators – that focus more on “staying with the trend”

Together, this “two-pronged” indicator trend analysis attack, with a diversified asset program and active asset allocation, as used by LFM, increases an investor’s risk-adjusted performance rate very nicely.

GENERAL MARKET INDICATORS

MONETARY– address “What security prices should do”

• INTEREST RATES
• MONEY SUPPLY
• CONSUMER AND CORPORATE DEBT
• INFLATION

SENTIMENT – address “What security prices are expected to do”

• # OF ODD LOT TRADES
• PUT AND CALL RATIOS
• RATIO OF BULLISH TO BEARISH ADVISORS
• RATIO OF BULLISH TO BEARISH INDIVIDUAL INVESTORS

MOMENTUM – address “What security prices are actually doing”

• PRICE AND VOLUME STATISTICS
• RATIO OF NEW HIGHS TO NEW LOWS
• RATIO OF ADVANCING TO DECLINING STOCK VALUATIONS
• RATIO OF UP VOLUME TO DOWN VOLUME

INDIVIDUAL SECURITY AND MARKET INDICATORS

LEADING indicators – spotting stock trends that are about to reverse

• STOCHASTIC OSCILLATORS
• RELATIVE STRENGTH INDEXES

LAGGING indicators – keeps you “riding the trend” and not exiting prematurely

• MACD (MOVING AVERAGE CONVERGENCE DIVERGENCE)
• MOVING AVERAGE TRENDS AND CROSSOVERS
• SUPPORT AND RESISTANCE TREND LINES

The hardest part of successfully spotting stock trends is not so much in what indicators (tools) you use, but rather how you use them. You must “stand watch” every day without fail to win. LFM has a research staff that knows how to use the indicator tools and, furthermore, does so daily. This makes all the difference in the world when it comes to spotting stock trends and then taking advantage of them for the betterment of clients.