Friday, October 31, 2008

Leadership stocks and lagging stocks

Leadership stocks and lagging stocks are two things you can look at when trading the market. These are stocks that are performing above average and below average.

A leadership stock is a stock that has done better then the market average for a set period of time. This period depends on your time frame. If you are long term you might look at a year or longer, if you are a short term trader you might only look at the day.

The lagging stocks are stocks that have done worse than the market for a given time frame, either a day or longer.

It is important to pay attention to this because comparing how a stock did to the market average can tell you a lot. If the S&P went up 2% today but stock XYZ only went up .5% it can tell you that this stock does not have that much buying pressure.

In addition it can tell you that the stock probably only went up because the market as a whole went up. If the market stays flat or goes down stock XYZ will be more likely to crash then other stocks. If you are trading a stock that severely under performs you may want to consider moving your stop up.

I never exit stocks that are severely under performing just because they are under performing but it can cause me to move my stop up.

However if the S&P goes up 2% and the stock ABC goes up 5% that could be a sign that stock ABC has a lot of buying pressure and will continue to outperform the market in the short term. I never enter a stock just because it is outperforming the market, but if it has just broken through resistance or bounced off of support in addition to beating the market in the short term that can be a good sign.

Determining whether a stock is leading or following the market can be interesting and help you gain confidence, but it should be used alongside other indicators.

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