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Sector Trading In Bullish and Bearish Markets

While there are many ways to trade the stock market, one popular method is trading with the trend. Trading against the trends can be a perilous endeavor and trading is largely about probabilities. Ask yourself, “What is the most likely result?”

When trading with the trend, taking a disciplined approach to stock selection and trade management will further skew the probabilities in your favor. To me, this means buying stocks in an uptrend and establishing appropriate entry and exit strategies prior to making my initial investment.

Lee Bohl and I discuss this process in our weekly Trader Talk in Today’s Market webcast. This article will focus on a quick method for locating stocks in an uptrend using a series of specific criteria to scour the entire market using the StreetSmart Edge® Screener Plus tool.

One way to think about buying bullishly trending stocks in a bullishly trending group is how you might pick an apple out of a basket. For example, you want to buy apples and have ten baskets from ten different orchards from which to choose. Do you want to buy the best apple from a basket of poor to average looking apples or do you want the best apple from a basket full of gorgeous apples? As such, I like to find attractive chart patterns for stocks in groups which are trending upward.  This puts the probability of success in my favor. 

With this in mind, I start with a review of the broad market trend by charting the Dow Industrial Average ($DJI), the Nasdaq ($COMPX) and the S&P 500 ($SPX).  Is the broad trend up, down or sideways?  Next, review the 11 sectors of the market. Which are the best performers for a 5-day period, 20-day period, or 6-months?  Which timeframe is the one you would like to trade?

Once identified, screen only within the group of stocks that is trending bullishly. Often, this eliminates a majority of the market from consideration, limiting the amount of analysis necessary. 

Here’s a screenshot of the StreetSmart Edge screener plus tool showing some of the standard criteria by which I like to screen the market.

Source: StreetSmart Edge®

These basic criteria are my starting point. First, I’m looking for stocks above $10 per share which are also trading above their 20-day Simple Moving Average (SMA).  Next, I want to ensure I have enough liquidity to enter and exit my trade, so I incorporate average 6-month daily volume greater than 100,000 shares.  Within the analyst ratings section, I include the A (strong outperform) and B (outperform) Schwab Equity Rating® requirement. This gives me a fundamental component to my screen.  Finally, in the technicals section, I want to find stocks whose 20-day SMA is higher than their 50-day SMA.  When this is the case, we’re often looking at a stock in an uptrend.

Considering all of this, the results page will give me well rated (by S.E.R.) stocks above $10 per share, trading above their 20-day average price and in the midst of an uptrend.  If we look throughout the entire market with these criteria, we’re likely to find more opportunities than we have time to analyze. To whittle this list down to a more manageable number, we add in sector criteria.  We can eliminate the poor performing groups from this screen and focus only on the best performing group by including the GICS sector/industry/subindustry. Click the Sector/Industry/Subindustry link:

Source: StreetSmart Edge®

This will give us a tighter list of stocks meeting all our requirements. Click results to see which stocks meet these criteria. Once on the results tab, rename this list by right clicking the tab and selecting ‘Rename the….Tab’ so it’s easy to locate. Next, click the Save as Watchlist button in the lower right corner. 

Source: StreetSmart Edge® 

To access this newly created list, open the watchlist tool and right click the ‘+’ symbol as shown below: 

Source: StreetSmart Edge®

This general method can also be applied to bearish markets with some minor tweaks.  Let’s see how.

Sticking with our theme of trading trending markets, the approach for finding bearish trading opportunities will incorporate many of the same principles, only in reverse. 

In bearish trends, stocks are often seen trading below their 20-SMA, using this line as a resistance point. These stocks will also reflect a 20-SMA below an intermediate SMA, like the 50-day SMA.  For our fundamental criteria, I assign the poorest rankings with the Schwab Equity Ratings (SER), D (underperform) and F (strongly underperform). 

Source: StreetSmart Edge®

Next, let’s review the worst performing sectors of the market consistent with our trading time frame (see below). 

Source: StreetSmart Edge®

Given the poor performance of the entire energy group over the prior 20 days, we can screen within this sector, or we can get more specific and highlight the energy equipment & services industry exclusively. 

Source: StreetSmart Edge®

Once highlighting the poor performing industry, our list is small but we’re likely finding exactly what we want. Bearish trends in poorly performing groups, rated poorly by the Schwab Equity Ratings. Click on ‘Save as Watch List’ to access in the watch list tool.

Source: StreetSmart Edge®

Ease your workflow by remembering to save your bullish and bearish screen tabs. By having these screens set up for your review each day, you can find new trades as they arise.  With my first cup of coffee, I start my day with a ‘top-down’ review as laid out above and simply change the sector, industry or subindustry I’m screening. One or two clicks and I have a fresh list of stocks for consideration. 

I’ve concentrated on how to take this approach to the market using Schwab’s flagship trading platform, StreetSmart Edge. However, many investors and traders do rely on Schwab.com for their research, analysis and execution of strategy. These concepts can be taken directly into Schwab.com to scour the market for these same types of trading opportunities.

While this article focused on locating bullish and bearish trending opportunities, it’s important to remember that ‘active trading’ does not mean trading the market every day, regardless of conditions.  For the portion of your investable assets you choose to commit to trading, it’s perfectly fine to sit on your hands until finding comfort to enter the market.  Checking out of the market periodically can be healthy for many of us. When in doubt, remember that preserving your trading capital is just as important as making money. 

Finally, when you’re ready to build your trade, consider documenting your thought process in a Trade Plan Worksheet. Really, what you use isn’t important. A spiral notebook, the Notes app in your phone, or maybe the Notes tool in StreetSmart Edge. Successful traders recognize the need to analyze their performance to continue improving.  Trading is a perpetual learning experience and analyzing the why’s and how’s of your wins and losses is very important to your long-term success. 

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