Top Down Approach

TOP DOWN APPROACH

Well itʼs your first real trading month in the markets and your wondering where to begin? How to get organized and where to find the best companies to invest in. The best way to accomplish this and be organized at the same time is the TOP DOWN APPROACH. The Top Down Approach boils the market down to what is working right now. All markets flow in a cycle, ebb an flowing from one time period to another. So looking at the whole market in whole the first thing we need to do is find out what SECTORS are currently leading the market. Leading sectors can follow many items, FED decisions, current economic cycles and political influences to name just a few. So much information, how can one possible filter all this. Use the resources that are currently out there. The Wall Street Journal, IBD, Barronʼs and many CNBC TV shows highlight the trending sectors daily. Another good source is watching the money flow into EFTʼs EFTs are a grouping of like sector stocks that are traded on a daily basis. You can buy and sell these EFTs which consist of a particular sector of stocks. The XLF is the EFT that supports the Financial Sector. If you take the XLF apart you will find that it consist of all financial companies. You can call your broker to get a list of all the EFTs out there once you get the list, make a watch list on your trading platform and you can track them daily. While listening to CNBC shows commentators are always letting you know where the VOLUME or BUYING is and what SECTORS are working. We want to be in the sectors that are working. These sectors that are working usually work for a while they “cycle”. Sometimes they cycle the whole year, sometimes for a few months so you always want to be up to date on what sectors are working. Everything about investing is about trying to make investing easier. Why would you want to invest in any sector or company that is not working and going against the grain. That is just lunacy. Make investing fun and easy, invest in things that are working.

So now we know what sectors are working. We are going to use the XLF Financial sector because it is working now because of Fed Policy and it may work all year! Financials are working so now we need to go inside the Financial Sector and find the companies that are “Best of Breed”. Best of Breed is a fundamental term that describes the financial condition of a stock compared to itʼs peers inside there sector. We what to be associated with the the best fundamental companies inside there sectors. An EFT consist of all companies inside the sector with good or bad balance sheets or financial strength. Where do we rate or find them? We look, listen and read! We listen to the CNBC commentary, they usually talk about the same financial companies over and over. We read the news publications, for example IBD ranks the stocks inside the sectors. IBD also if you subscribe does the work for you with their “Stock Check Up” feature and grades the Balance sheets of the top companies inside the sector. If your really anal you comb the balance sheets determining the PE and Multiple. This is something you should know and also how to do it but with all the resources out there in this age itʼs to easy to find it else where.

So now we have our top 3 to 4 financials. Letʼs say they are JPM, GS, BAC and C. Which one or maybe all to buy. Well that depends on a number of things and your investment risk tolerance so everyone is different. I like to find 1 or 2.The next check box is Technical Analysis. I had you set up your charts last time so itʼs time to go to the charts! The charts tell the trading story of our stocks. How they react and volume or buying of the company. The best thing we can have happen to our stock is have institutional investment. Big money Mutual fund investment is great and we can find that out also by poking around in our publications or online research. The charts let us know where in the buying cycle our stocks are at either short or long term.

When do we buy? Well I donʼt want anyone buying currently. We are waiting for a pull back in the market currently and none of the above mentioned stocks are at good buy points. So play around with this information, resources and try to determine of current good sectors. Get used to finding the best companies for current market conditions.