Hey, this is Sasha Evdakov, Founder of tradersfly.com. Here to share with you some trading questions from other traders and investors. That’s the point of the tradersfly.com, if you want to see other trading questions and investing questions go to the website, right there.
Now today’s question is what are the leading or leader stocks and why should you watch them?
First off, in this two-part question what are leader stocks or leading stocks?
What are the leader stocks?
We’ll typically stocks that have the highest regard in the industry that to me are the leader stocks. Those are the ones that have been moving for quite a while. It’s stocks that many think of positively or positively.
It’s not always stocks that have the highest earnings regarding dollar value but stocks that beat their earnings on a consistent basis. It’s the companies that very positive in most investors mindset, and typically they are the ones that have continued to run to the upside for quite some time. They’re favorites in a way, and they are more bias, people are biased towards them because they like those stocks or those companies because they’ve been consistent in their returns.
Why are they called leaders?
So the next part is this why are they called leaders?
Well, leader or leading stocks lead or in another word guide the market higher first, they are usually the first ones to break out to new highs and then usually the market follows after that. Meaning the other companies and the other stocks.
They are usually the first ones to sell off, and then you often see the market follow or after these or often week can sell off.
In general, leaders lead the market. They drive the market higher and then they also lead the market lower. And that is because of a few different factors.
Why does this happen? Well, it comes down to money flow.
Investors try to get into key positions. First, those are the stocks that break out first. After I think about it this way if you only have $10,000 and you see two or three stocks working well once you want to get into one or two of the best companies first. And then if you have some leftover money you could diversify yourself or hedge your position by buying a little bit of gold or buying something else.
But most of your money is going to get into the key positions first. And most people pile into that top 10% or 20% of the market just like the 80/20 principle. Or when you go to a grocery store, 20% of the food that’s healthiest is right there in that organic section. Or right there in the fruits and vegetables and healthy section.
In any case, later if they have the remaining money, they get into other favorable positions. That’s what happens in the market.
And when the substantial profit is made, investors are first to get out of those leaders because they’re going to be making more money and profit from those leaders because number one they run much faster than the other positions and number two they’ve been in them longer so that the more extended opportunity to run further. They want to protect their profits, they get out of those first and then later often the market follows as well.
Key Signals from Leaders
Some key signals from leaders often even if you do not own or trade the leaders you can get key signals of market direction depending on what the leaders are doing.
It’s important to watch the leaders because it’ll give you an idea of how the market is moving, acting and behaving. If the leaders are slowing down then probably the market is slowing down as well.
You don’t have to follow a thousand stocks; you can support these few leading companies.
In rare are times leaders may not be leaders for the market. In which case you need to trade cautiously.
Sometimes during weird economic news during cyclical breakouts, during specific announcements, during currency problems or even global market risk, if for specific moments or periods of times it could just be for a week or couple of weeks or maybe one or two months. The leaders may not be leaders, and that’s really where you might need to be a little more cautious because these signals are not a 100% accurate.
It’s just they give you some insight, but in general most of the time, I found that it to be reliable if you watch the leaders how they move, act, and behave, the market eventually will follow. And if you see the leaders slow down, then the market often slows down. Keep those things in mind when looking at leaders.
If we look at the charts and if we look at some leaders or past leaders you can see that Apple right here if we look at the monthly chart was a leader at one point. You can see that the stock continues to go higher, pull back, continues to go higher. And now it’s pulling back again, could it still be a market leader if one more volume, more buying comes in then it could be a leader. But at the moment it’s not a leader.
These leader companies do wealthy if you could take a look at Amazon, you can see that this stock has a few pullbacks, but overall it’s been a market leader now coming into all-time highs. What I do is when you watch these things, when you see Amazon here slowing down.
Here are some key signals and right now we’re in around mid-July 2016. You can see this stock slowing down, overextended, the stocks slowing down, had a few more days of popping action and now again pulling back. And if you watch the market, if we look at the SMP, we can see that during this time where the market was trending higher, Amazon, was pulling back. That to me shows me there’s caution and now look at what’s happening to the market?
Again, we’re getting a sideways action, and you could say slowing starting now to initiate a pullback. It’s not going to be a major pullback at this exact moment but the pullback is starting to pick up a little bit for today, and the market has been moving kind of sideways.
Other companies have moved the markets higher, but overall you would see this leading company as it pulls back the market stalls out and moves sideways. Sometimes you get that inside into the market. It’s not always going to be a hundred percent accurate.
You can also look at Tesla here which use to be a leader, if we look at the monthly, and you can see the stock popping higher, now moving pretty well sideways. Now, it’s just in the sideways consolidation area, but if the stock continues to roll over, then you could see more money rolling over as well. Because there’s a lot of o money tied into this because there’s a lot of money flow in this company.
And this is what you want to do, and you want to watch this leading company like Netflix, like Google at the moment.
And these leaders don’t change that often. They do change but typically it’s the more important stocks, and you can see Facebook as well. Powering higher and then the market also. Went higher now you’ll go to look pullback, leading companies, they lead the market higher when they’re powering higher, and then the market follows. And when the leaders roll over typically the market follows as well.
Sometimes it comes together one on one, almost at the same time, other times are just like delayed by a couple of days, a couple of weeks. Well, it just depends.
But keep an eye out for these leader companies because this is where the money flow is. That’s what people hold their money.
