Invest and Trade Profitably with Jon Johnson

As an active trader/investor I always watch overall market first and then dial into individual stocks long if the market is friendly. Step aside when market is mixed and short when the three big indexes are in sync going down. Someone recently said, “Remember a stocks price=~50% market, 25% Sector and then 25% actual stock.” Are you aware of this? or do you have any way to validate these numbers?

August 30, 2000

We teach in the seminars (and we repeat here from time to time) something of the same thing but slightly different. We say that 75% of the stocks follow the overall market. This makes sense when you think about it. Stock prices are driven by earnings and when earnings are expanding overall, stocks rise overall. When they are contracting overall, stocks fall overall. That is the general rule.

Any individual stock, however, can have a different story that bucks the overall market. It can also pertain to sectors. When the market was struggling this year, oil stocks were not; oil prices were higher and they were moving higher in strong uptrends while the majority of stocks were struggling in their base. In 2004 the SP500 has moved mostly sideways but a stock such as RIMM has tripled. EBAY more than doubled in the same period. We remember DELL in the mid to late 1990’s seemed to rally no matter what the rest of the market did. Recognize a common theme? Cutting edge businesses riding the crest of the technology boom, producing huge sales and earnings. It is not limited to just technology but works for the cutting edge in any industry.

Obviously the market is not populated with thousands of stocks with that kind of strength. Overall companies in the market are at various stages of life in their businesses, and their stocks reflect this. Most are not at the growth spurt stage and are at the cutting edge of their industry. Thus their prices do not defy the rest of the market as the elite leaders do.

That is why we say that 75% of stocks follow the big ‘M’ basically all of the time. It might be a higher percentage than that, particularly when the market gets to extremes either way, but it is a good general rule of thumb. You are approaching the market correctly by backing off when things get turbulent, when the weather starts showing signs of change. We are going to see how this big volume day pans out, but we are also still cognizant of the trend. Weather changes and storms blow in when a trend gets shaky. That is always a good time to seek at least some shelter.

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