In last week's Stay in Step with the Market webinar, the MarketSmith product coaches discussed general market analysis. The three gauges that we use to measure the health of the market are: the general market price/volume action, how leading stocks are faring, and your portfolio’s performance.

 

With respect to the general market, we’re focusing on follow-through days (FTD) and subsequent distribution days. A FTD signals a potential change in the overall trend. On 10/21/2014, the Nasdaq followed through to the upside, up 2.4% on volume higher than the prior day. This shifted the market back into an uptrend.

 

Now that the market has given us the green light to start buying leading stocks breaking out of bases, we look at the action of the leading stocks. Many leading stocks are still working on bases and recovering from the market’s precipitous decline several weeks ago. Since most of the leading stocks haven’t broken out yet, we remain cautious from that standpoint. Ideally, over the next few weeks, more leading stocks will set up and break out.

 

The final indicator we used to gauge overall market health is your portfolio. If you are gaining traction in your portfolio, then you can be confident in your decisions. However, if you are just treading water or losing ground in your account, then that reinforces a need to remain cautious. You never want to plunge in and out of the market. Instead, we want to methodically move in and out of the market as each day progresses. Most likely, there hasn’t been much progress in your account recently due to the overall action of the leaders, so that forces us to remain conservative at this point.

 

Using all three of these market gauges can help you remain engaged and on the right side of the market regardless of the direction. Not losing money during tough markets is as rewarding as making money in a good market. Knowing the difference between these two types of markets can help you achieve alpha in your portfolio.

 

Best Returns,

The MarketSmith Team