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Stock Pickers Market Environment

There are two distinct types of markets. One is a market that is driven primarily by the indexes. In this market, top-down forces such as macroeconomic, geopolitical, and global factors influence the overall market. Individual stocks do not have much impact as the above factors. The second market is when the performances of individual stocks drive the broader market. Bottom-up factors such as corporate news and financial information from companies influence the market. When major stock market indexes lack discernable trends, and top-down forces are nominal, investors will be more selective, focusing on solid technical patterns, robust fundamentals, and favorable quantitative numbers.

Markets are cyclical by nature and will return to the mean. Over the past decade, index-driven or passive investing has been the dominant investment style for many investors.


Is there a structural change to merit a change in investment style from index-based or passive investing market toward active investing or a stock picker’s market?


Stock selection becomes increasingly critical to outperformance in a challenging economic and volatile stock market environment. Stock pickers tend to excel when the internal correlation between stocks is relatively low. The dislocations between stocks create opportunities for astute investors to select stocks that can outperform the benchmark index.

When the macroeconomic forces drive the stock market, correlations tend to rise. Money managers will have fewer opportunities to differentiate themselves from the rest of the market. Stock correlations were high, and return dispersions were low in the past decade leading to active managers underperforming benchmark indexes.

The covid-19 pandemic in 2020 has been one of the catalysts that led to active managers performing better, as widely dispersed stock returns favored the stock pickers. With the stock market headed toward a volatile period as the Fed hikes rates to fight inflation, will investors turn to active investing or passive investing? Today, money managers with heavy positions in commodities, energy, and materials have outperformed the market.


There are very few investors that are currently 100% passive or 100% active. Investors tend to fall along the spectrum. Whether investors favor an active or passive approach to investing should not matter as much as adhering to a disciplined investment and risk management strategy.


Chart reading is an integral part of technical analysis. Prices reflect current and future corporate news, financial information, and other data. However, different chart patterns can convey bullish, bearish, or neutral tendencies.


No one chart pattern works best for all market conditions. Specific patterns favor volatile markets, and others are best suited for stable trending markets. Some patterns work best when the trends are decisively bullish or bearish.


It is crucial to utilize the appropriate chart pattern based on specific market conditions. Deploying the wrong patterns or not knowing which one to apply may result in missed opportunities and losses. The patterns are not guaranteed to work all of the time. The patterns only convey an indication of the likelihood of the outcome.


Chart patterns fall into three categories – a continuation, reversal, and non-trending trading range. Popular patterns include head and shoulders bottom/top, double top/double bottom, rounding bottom/top, cup and handle, rising/falling wedge, pennant or flag, ascending/descending triangle, symmetrical triangle, etc.


Chart patterns can be helpful to identify the next directional trend of a stock. Chart patterns can provide critical support (accumulation) and resistance (distribution), enabling investors and traders greater confidence to act before the trend reversal occurs.


Attached are bullish technical screens from the S&P 500 Index universe.


Source: Courtesy of FINVIZ.com

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