Check the Broader Market Before You Buy the Stock

Ask how much of a typical stock’s daily move comes from the market itself. For most large and mid caps the answer is a substantial fraction, with the company’s own news making up the smaller part of any given day and the tide making up the larger.

Which has a direct consequence for anybody picking individual names. The first chart to open belongs to the index.

A Saturday planned in detail on Friday evening is decided entirely by the weather. Several people, several sets of intentions, one sky. A carefully argued case for the zoo collapses in under a minute because of something happening several miles up and quite indifferent to anyone underneath it. Nobody argues with the sky. You look out of the window first, and then you find out what sort of day you are actually getting.

Why the tide dominates

Most of the money here is managed in baskets. Index funds, sector funds, factor strategies and the risk models sitting behind them buy and sell hundreds of names at a time, for reasons that have nothing to do with any one of those names, and when that money moves every stock in the basket goes with it whatever the company itself did that morning.

So a clean setup on a day the index is falling hard is a good idea fighting a very large flow. The stock may well fall less than the market around it. It will usually still fall. Falling less pays nothing. The account is credited in prices, and a decline that happens to be smaller than the one the index took is a decline all the same.

Put it this way. A strong stock in a weak market belongs on the list of things to buy once the market stops falling, and on that particular day it belongs nowhere else. That distinction, small as it looks written down, accounts for a fair part of the difference between a watchlist worth keeping and a month that ends in the red.

The one-minute check

No model is required for any of this. Before you open a single individual chart, three things.

Start with the index on the daily timeframe. Above a rising 50-day average with higher lows, and the tide is running with long positions; below a falling one with lower highs, and it is running the other way, however good the company happens to look on its own chart.

Breadth next, where you have it. An index rising while the share of stocks above their own 50-day average falls is an advance being carried by fewer and fewer names, which makes the tide weaker than the headline number suggests and tends to end sooner than the headline number would have you believe. The market internals guide covers this properly.

Then today’s session. An index down more than a percent by mid-morning is a day for being selective or absent, whatever any individual chart happens to show.

An illustration

Take a journal where a run of trades carries the tag “market down, stock strong.” Each one felt like an edge at the time, the single name holding its ground while everything around it gave way. Read as a group they behave like a slightly diluted version of the index. The stocks do hold up better. They also decline, the stops are hit anyway, and the ones that go on to rally tend to manage it some days after the position was closed.

The blunt rule that deals with this is no new longs while the index sits below its 50-day average and falling. Names with relative strength go on a list. The list gets used when the index turns.

Applying it

1. Open the index chart before anything else. Settle the tide, then look for boats.
2. Take long setups when the index is in an uptrend, or at the very least when it is out of a defined downtrend. A falling market works as a filter, and hunting for exceptions inside it is how the filter comes to be ignored.
3. Keep a list of the stocks showing relative strength through market weakness. They are often next month’s leaders, and the moment to buy them is the moment the tide turns.
4. Size more conservatively when the index is volatile, even where its direction is favourable, because correlation rises with volatility and with it the chance that a broad market move is the thing that takes out your stop.

The technical analysis guide puts market context at the top of the reading order for this reason, and relative strength beats cheapness covers what to do with the names that hold up.