How To Analyze The Stock Market

The Market As A Whole

Today we are going to explain how to analyze the stock market to see if it is healthy or struggling. Each stock is different, so it’s possible that a single stock may be doing well, while the overall market isn’t. We are specifically looking at the overall stock market today, though we will explain how to analyze a single stock in a future article.

Break The Stock Market Into Sectors

The first thing to do when looking at the health of the stock market as a whole is to break it into sectors. It is common for some sectors to be doing well, while others are failing. The healthcare industry probably has very little to do with the retail industry, housing industry, etc. Being able to break the market down into its individual sectors can greatly increase your understanding of the overall market.

Stocks That Break Pattern

In any group of stocks there will always be some that don’t fit the pattern. Many companies that break the overall market pattern for their sector are startups. Startups are influenced by many different things as they try to become a profitable and successful company. While I don’t advise against investing in startups, when analyzing the health of a market sector, it’s best to disregard startups in most cases. The only times this is not true, is when a startup or group of startups are taking a different approach to an industry that the industry leaders are not. Think of electric cars vs gas cars. If there are several electric car company startups that are doing well, the market leaders that have chosen not to adopt the new technology might be doing worse. The opposite also works, since new ideas and innovations are not always accepted by consumers.

Analyze In Time-frames

Now that we’ve taken into account the differences in industries and the effects of startups, we can start to truly analyze the market’s overall health. The next step is to look at different timeframes of history with each major stock. Look at periods of 3-6 months for recent trends and 6-24 months for longer trends. This give you a good idea of where the stock has been and how different events or seasons may have effected them. With this data, you’re almost ready to make a conclusion on the health of the stock market.

The Final Pieces

The last 2 things to look at when analyzing the market’s health is trigger events and sh ort-term prices. Trigger events can be anything from a new product release to a country wide economic event. If you were analyzing the health of the stock market in 2007-2009 you would find different trigger events revolving around the housing crisis. If you were analyzing the market near Christmas you might find retail or online stores increased or decreased due to higher or lower sales. With these trigger events in mind, you can look at the recent history (the last 3 months) of the stocks to see what might have caused any recent changes. Using all of this information, you can now reach a conclusion on the health of the stock market.


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