Trading With The Stock Market Trend
By Ultimate Trading
The Stock Market Trend: Short Selling Weak Stocks, Index Additions & Window Dressings
In both rising and falling markets stocks can become targets for
shorting as a result of a
market trend. Shorting is always a stronger strategy during a
bear phase, but many short plays work extremely well in bull
markets. In fact, some shorting opportunities don't even arise in
bear markets because a shortable stock market trend is the
after-effects of a buyable stock market trend.
An example of this is the reliable stock market trend of weak stocks
falling after they have run up on moderate news. Let's say the
biotech sector has been hot during the last couple of weeks. Then a
small pharmaceutical firm puts out a news release that its new drug
has passed its trials and will soon go to market.
The market's perception of the news is extremely positive, and the
stock market trend forces it to rise 30% in two days. Your analysis
says that the stock market trend wont hold at that level. So you
wait for what you believe will be the stock's final push upward,
short it near the top, set stops to protect yourself, and wait for
the stock to fall.
Stocks like this that rise on news can be traded during both parts
of their journey; long on the way up, and short on the way down.
They're ideal for trading because once you've watched a few similar
situations, you'll get an idea of just how far a stock market trend
is willing to push them up.
Adding a stock to a major index is another stock market trend that
creates a strong upward push on prices. Mutual funds that track
major stock indexes have to buy any new stock added to an index in
order to keep pace and follow its investment guidelines. The larger
the market capitalization of the company added to the index, the
more shares the funds need to buy. The increased buying pressure on
stocks added to indexes tends to drive their prices up, creating a
great stock market trend opportunity.
The stock market trend may or may not begin to move on the day the
index addition is announced, but it generally starts to move up in
earnest one to two weeks before the addition actually takes place.
Once the stock enters the index, its price tends to fall as traders
take profits. Remember, traders always sell on news. The stock can
fall for several days after it's been added to the index. This
allows the stock market trend to be traded long on the way up, until
the day the stock is added to the index, and short on the way down,
after it's been added.
Mutual funds are the source of another profitable stock market trend
for traders. At the end of each quarter, mutual funds try to dress
up their portfolios by buying the stocks that have had the best
performance during that quarter. They do this to mislead potential
investors into thinking that the fund's managers are great stock
For example, if semiconductor stocks did well during the quarter,
funds may load up on them during the last week of the quarter so
their "holdings" list will give the impression that they have made
wise trading decisions. It's completely superficial, so it's called
"window dressing." It's possible to make money on this stock market
trend by buying shares of high performing stocks just before the end
of the quarter to catch the price rise when funds start buying large
The flip side of window dressing is that funds often dump their poor
performing stocks, stocks in any group that's under performed during
the quarter, right before the quarter ends. You can try picking up
stocks in under performing sectors at the end of the quarter,
because they'll often be picked up again during the next quarter by
the same funds that just dumped them. The funds still want the
market trend, but they don't want to reveal to investors that
they owned so many underachievers, which gives savvy traders a nice
opportunity to profit.
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