Are you watching the behaviour of leading stocks?

Posted by Stephen Sutherland on Wed, Jun 26, 2013 @ 01:30 PM

Are you watching the behaviour of leading stocks Throughout the year, come rain or shine, we love to watch the daily activity of the market’s best stocks. The reason we watch them like a hawk is because they tend to lead the market higher – and lead the market lower – before the general market catches on. This means that they are a very good indicator of which direction the market is likely to head next.

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For example, back in 1999 during the technology bubble, leading stocks at the time were equities such as Yahoo! and Microsoft. As you can see on this 20 year chart of the NASDAQ Composite, the general market topped in March 2000.

Image 54 March 2000 top

The market may have topped in March 2000, however Microsoft (ticker symbol: MSFT), a leading stock at the time, topped in December 1999, giving investors a signal that the bull market might be close to a top.

Image 55 MSFT

Yahoo! (ticker symbol: YHOO), another leader at the time, topped in January 2000, which was another clue that a top was coming.

Image 56 YHOO

As I mentioned, it also happens on the flip side too. Stocks such as Rio Tinto (ticker symbol: RIO) and BHP Billiton (ticker symbol: BHP) were two of the leading stocks at the start of the bull market that began in 2009.

Image 57 Bull market begins

Therefore, it’s interesting to note that BHP Billiton bottomed in November 2008, four months before the market turned around.

Image 58 BHP

It’s also interesting to see Rio Tinto (another leader in 2009 and 2010) bottoming out in December 2008, which was three months before the 2009 bull market began.

Image 59 RIO

It’s also good to know that a leading stock can become a laggard stock. A leading stock is one with an RS (relative strength) rating of 80 or above and an EPS (earnings per share) rating of 80 or above. Stocks’ ratings change on a daily basis, which means it’s probably a good idea to always have a list of stocks that you class as leaders and continually work on adding new members to the list and removing stocks that no longer match your leading stock criteria. 

As always, if you have any questions or thoughts on the points covered in this post, please leave a comment below or connect with us @ISACO_ on Twitter.


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Topics: ISA investing tips, Investment strategy