Am I looking too much at the major indices? Can certain stocks defy correlation?

[AirborneTrader]

Hi,

I'd appreciate some of your suggestions on this. I've always kept a close eye on the major indices, principally the SPX but also the QQQ and IWM. With the high correlation between stocks and the major indices I tend to let the averages bring down good stocks and I buy oversold conditions and lighten up on the way up. It works for the most part but I'm also missing a lot of good moves. I tend to lighten up too early too and then miss a lot of the action. A good example is now. I sense we're at the upper end of the range and went to cash a while back. I'm very hesitant at putting money to work on the long side. My view is that once a short term correction is underway all stocks, even the best, will come down and that's the time to buy.

So here's my question. Can many of the best stocks defy the averages and continue their uptrend even during a good selloff? Am I looking too much at the indices? Or are all stocks so correlated nowadays they pretty much all act as one? I don't mean one day wonders but more extended moves. Thank you in advance! :clap:

Airborne

 

[TradingCommandFA]

Hi Airborne,

One thing to remember, the indices are meant to track a basket of stocks. Thus the indices will go down if the stocks they are tracking are mostly sold down. Individually, these stocks and also applicable to those not tracked, do not follow the indices. Thus, even during a good sell-off, stocks may defy the averages and continue their uptrend.

Although best stock may not be affected by the sell-off, many investors use indices as a gauge to whether the market is currently in an uptrend or downtrend and decide if they will enter or exit the market.

 

[hyunski]

Hi Airborne,

I've been looking at the exact same indices for a couple of months now and asked the same question. I've figured out so far that most of the time momentum stocks will show lop-sided beta...that is they will be more resilient on downturns and more sensitive on upturns (if you're long).

It's also helped me to observe my watchlist of momentum stocks. If the market is down and most of my stocks are down, I see it as a high correlation day and opt out from long. If the market pauses after a freefall and some of my stocks are up, I am most interested in those stocks.

But sometimes, stocks that have very strong catalysts find the market irrelevant. If you look at the fuel cell stocks during its rage, you'll see that the market had very little to do with its movement.

I don't trade equities anymore, but I hope this helps!