The General Market Does Affect Individual Stocks

There are many sayings on Wall Street and one of them is that a rising tide lifts all boats. What is really being said is that the general market makes a difference in what particular stocks do. If the general market is rising, then the majority of the individual stock issues will benefit from that rise. Conversely, if the general market is falling, then the opposite effect will be true to individual issues. Although the concept is simplistic, you can expand it to include some additional complexity and then use that knowledge to remove some of the frustrations associated with trading. A common frustration is to enter a trade in one or more stocks based on a successful past history of a given technical pattern only to see the trade(s) fail. Many times failures occur as a result of general market conditions that contribute to the failure, not because the stock that you are trading has a problem.

Sectors

To illustrate the point, we first have to understand that the market consist of many cross currents some of which are readily apparent, some which are not. At any given time there will be stocks going up and down. To a lay person, it can all look very confusing.

To try and make sense of it, consider that the general market consists of market subsets, if you will. Common groups of stocks that most people are familar with are technology stocks and the financials. These are two large and important groups of related stocks that, by virtue of their name, are commonly known and reasonably understood but there are many more. There are consumer stocks and the durable goods stocks as well as others like the internet and internet infrastructure. All told, there are many more groups of stocks than one would imagine. These groups of stocks are many times referred to as sectors.

Another point to be made is that many of these general stock sectors themselves can be subdivided into small sectors. For example, the technology sector consists of the semiconductors and bio-technology as well as additional sub-sectors like the software sector.

Now some sectors of the market generally move together while others move opposite. For example, usually when the oil sector stocks are moving higher that is typically not very good for the transportation stocks but when the semiconductor sector moves higher it generally helps the software sector.

Trends

Intertwined with the idea that there are many sectors that comprise the market there are several trends that are in place at any given point in time as well. Most market technicians identify three trends of Long, Intermediate, and Short Term (also known as Primary, Secondary, and Minor as defined by Edwards and Magee). These three trends apply to the market as a whole but more importantly, the trends also apply to each sector and, not to be ignored, they also apply to each individual stock as well (ETFs and other instruments also have trends).

So that we may talk the same language, a Short Term Trend (Minor) is defined as a trend that lasts as little as intraday and as long as a week or two, maybe three. An Intermediate Term Trend (Secondary) trend is a trend that lasts longer than three weeks an up to several months. A Long Term Trend is defined as a trend that lasts longer that several months.

Making Sense of it All

So, we now know that the market really is comprised of many sectors which themselves consist of sub-sectors and finally individual stocks. We also know that each stock has three trends occuring at any given time and that on a larger scale, each sub-sector also has three trends occuring as well. Taking it one step further, sectors likewise have three trends apparent and on the largest scale, markets themselves exhibit these same characteristics; namely three trends at all times.

Note that the three trends are not always in sync with each other. For example, a market can have a short term bullish trend while the intermediate term trend is bearish yet the long term trend is bullish. In fact, there can be as many as nine combinations of trends given that there are three trends and three possible directions a trend could be in (bullish, sideways, bearish).

... to be continued ...