Our first Introduction to Investment Research webinar was this past Tuesday and we had quite a turnout. But, we’d like to put the content in smaller, bite-sized, and more tangible portions, so we’re doing a five-part blog series that recreates the research covered in the webinar. Today, we start with Getting a Feel for the Market.
Also, we at Stock Rover want to stress that that there are many different ways to invest and to approach investing, and this is just one particular way that is pretty straight forward and repeatable. So please keep in mind that this is merely one way you can do research, it is by no means the only way or the best way.
First, before we even start looking for stocks, we want to see how the market is doing, in order to see if we’re swimming with or against the current. So, we’ll use the S&P 500 as a proxy for market conditions. Basically, we’re just going to be charting the S&P 500 with progressively longer time periods, and then we’ll add in the simple moving average at the end.
To begin, I’ll put it in the chart (using the Benchmarks menu) with a 6-month time period.
In the past 6 months, it looks like the trend is generally up, with a bit of choppiness. Now let’s look at 1 year.
Again, we’re seeing a general upward trend (up 21.9% over this time period, which you can see in the legend) but with some bumps, and a more significant turn downwards last fall. Now, 2 years:
There was some pretty severe choppiness early on, but for the past 18 months or so there has been a general bullish trend (up 27% this period, as shown in the legend). Finally, let’s take it all the way back to 5 years.
Here we can still see some of the financial crisis early on, but again, it has an overall upward trend with some rough patches. So we’ve pretty much settled on the fact that we’re looking at a bull market
Next, we’re going to add in the simple moving average so we can see when there are crossovers. The SMA is in the Technicals menu in the chart’s toolbar, and we’ll keep the default settings, which are the 50-day and 150-day simple moving averages. When the 50-day average falls below the 150-day average it’s called a bearish crossover and in general that is an indication that the price is going to continue downwards. On the flipside, when the 50-day average crosses above the 150-day average it’s a bullish crossover and that indicates that the price will continue to move upwards.
Here you can see there was a bearish crossover in June 2008 that preceded a huge drop downwards, a bullish crossover in late May 2009 which preceded a long run upwards, a couple of more crossovers that accompanied the choppiness in mid-2010. To skip ahead, it looks like more recently the 50-day SMA has been diverging above the 150-day average, which points to a positive growth trend, reiterating the fact that the market is in a bullish trend right now.
So, now that we know the market is generally bullish, let’s take a look at how all the sectors are performing. In this section, we’ll chart all of the sectors against each other, and then compare them to the S&P 500 to see if there are any we should avoid.
First, I’ll clear the chart, and then, by right-clicking “Sectors” in the Navigation panel and selecting “Chart All,” I’ll add all the sectors to the chart. I’ll also switch the time period to 6 months, as well as make the chart bigger by dragging its upper border upwards and collapsing the Insight panel. And…voila!
Ok at least one of these lines sticks out, and not in a good way. That blue line nose-diving into the lower right corner is Basic Materials. Yikes. Let’s do two things with that information:
In reverse order, I’m going to go to the Notes tab in the Insight panel and make a new note with some of the observations about the market thus far, so I’ll bring back the Insight panel, click the Notes tab, and add my observations:
Next, I’ll remove Basic Materials from the chart and take another look.
Healthcare is leading the pack, with Energy not far behind. But let’s put in the S&P 500 as a benchmark, and then set it as a baseline so we can see how these sectors are doing comparatively over the past 6 months.
Here the picture is a little clearer. Healthcare and Energy are outperforming the S&P 500, and most notably Communication Services and Real Estate are underperforming the S&P 500. If we go down to 3 months, we’d see a similar picture. Let’s add to the note we created earlier.
Alright, so now I have it documented that overall the market looks good, but I want to avoid Basic Materials, Real Estate, and Communication Services, and that Healthcare looks good. Now, keeping these in mind, we’re going to move on to finding specific stocks with Stock Rover’s screener, which will be in the next blog post in this series. Until then, happy researching!
Link to part 2 – Finding a Stock to Research
Link to part 3 – Researching a Company
Link to part 4 – Compare Against Peers
Link to part 5 – Compare Competing Investments