How Well Do You Follow the Stock Market?

By Brandon Hedgepath

As an equity manager, it’s RTM Capital Advisors’ job to closely monitor the U.S. stock market. Although there is roughly half the amount of stocks that there once was since the mid 1980’s, one of the factors that help us determine the direction of the markets is by screening every stock daily.

There are currently 3,812 stocks that determine the direction of the market. In our opinion, a good percentage of these stocks need to be performing well for the market to be considered healthy, and it’s this environment that an investor wants full exposure in. Having a fully invested portfolio when most stocks are participating in a rally would be a risk on position. By tracking a broad unweighted universe, RTM Capital Advisors will get a better look at where money is being allocated and by how much.

More money being put to work will show up as accumulation.  In a good strong market, there are continual signs of buying.  If more buyers are coming into the market than sellers, and we see this across a large portion of stocks in the complete universe, then we have an ongoing conviction that this environment will favor a long equity position.  Conversely, when there are more sellers than buyers, and market volume shows signs of a distribution out of the market, this environment needs to be treated with caution through a reduction in your portfolio exposure or being fully invested in cash. Signs of a distribution have always showed up in market tops before a major decline. By at least screening the whole universe of stocks, you have a better perception of the overall market health than by just tracking the S&P, Dow Jones, or NASDAQ alone.

Additional market indicators include:

• Key Averages
• Market Momentum
• Relative Strength
• Broad Participation in Various Sectors
• Up vs. Down Volume
• Accumulation of Volume
• Seasonality
• Individual Stocks Making New Highs & Lows
• Big Volume Sell-Offs or Potential Good Set-Ups

Although these are broad and general concepts of how we follow the stock market to determine the type of environment we are in, we know our hard work in making these market interpretations and using the complete universe of stocks is the right way to manage risk in your portfolio.  RTM Capital Advisors believes that cash can be a good position, especially when the market averages catch up to the general market, which has been selling off prior to the weighted indexes.