Investing in the markets can be a challenge. First, you have a range of asset classes to choose from, including bonds, stocks, commodities, options, ETFs, REITs, Mutual Funds and real estate, Within each category you then must choose the ones you believe will perform best. This is where you must spend some time doing your homework. You can simply choose a mutual fund and hope for the best that the overall market will keep going up. If, on the other hand, you want more control over your investments you must delve deeper into the markets.
Overall Market Trend
To get a sense of whether the market is moving up or down, many investors use moving averages. The most common are the 50- day moving average and the 200- day moving average. The 50- day average is more immediate, while the 200- day average is longer term. Ideally, you want the overall 50 day market average to trade above the 200 day average. This indicates nearby strength and vice versa, if the 50- day average is below the 200- day average you are seeing nearby weakness.
Buying the Averages
You can decide to buy market indexes such as the Dow Jones Industrial Index, the S & P Index or the Nasdaq Index. Each one is different. With the DJI you a focusing on the 30 key stocks that make up that index. For the S & P 500 you are investing in 500 leading companies that make up that index. With the Nasdaq 100 you are getting a share of the 100 largest technology stocks.
Moving Deeper into Sectors
The overall market is divided into 10 sectors. They are Basic Materials, Consumer Goods, Consumer Services, Financials, Health Care, Industrials, Oil and Gas, Technology, Telecommunications and Utilities. If you feel strongly that oil and gas stocks will advance, you have a few choices. You can buy an ETF that includes the major oil and gas stocks, or you can look and the individual stocks that make up that category and pick the ones you like best among them.
Money Flow Indicators
As you become more sophisticated in your analysis you may want to track the money flow both for the overall market and the individual sector you are trading. WSJ under their topic “Market Data” gives you daily, weekly and monthly money flows for the market and individual sectors. If you are a longer- term investor you might want to follow the monthly numbers. Here are some of the latest changes. For the overall market, the Dow Jones Industrials saw a minus –1,354.66 (millions). This was money taken out of the market. By sectors, outflows in Health Care were largest with a minus –3,094.02 (millions) followed by Financials with a minus –1,809.82 (millions). On the flip side we saw an inflow of plus +1,195.96 (millions) in Technology.
Keep in mind that you do not want to blindly follow these data. However, they will give you a heads up if something dramatic is happening. It will also help you to decide which categories are the strongest as measured by their money flows. You can also use the data to make decisions on entry and exit for your positions. For example, if you see a large outflow is a particular category, it might be wise to avoid it. Vice versa, if you see money moving into a sector that is probably where you want to be.