Four Ways to Find Themes in the Stock Market

In my recent post, I talked about the importance of finding themes in the stock market and how those themes can be useful in identifying turning points. But how does a trader find themes? How can an active trader stay focused on his or her market and yet keep vision broad enough to detect the thematic shifts that occur when trends change? Here are three ways to find stock market themes that I've observed among the traders I've worked with--and that I have therefore modeled in my own trading:

1) Make News Part of Your Daily Preparation - I cannot emphasize this highly enough: if you know what large market participants are tracking, you can anticipate their behavior. This means following the news that they follow. Many times breaking news stories can be useful in identifying themes early. For instance, I quickly picked up on U.S. jawboning of OPEC and tensions between Venezuela and Columbia as items that could affect the oil markets (and therefore that stock sector). There's a reason portfolio managers keep a Bloomberg news ticker on their screens, even though they are not necessarily frequent traders: they want to catch trends and ideas as those unfold. I like the Bloomberg web site, which categorizes stories by region and asset class. A particularly useful application is the Newsflashr site, which taps directly into the world's major news feeds and automatically updates and sorts news as it is disseminated. The news feeds are truly global, and a handy "cloud" at the side of the page helps you find hot news topics. I just clicked on the "business" section of the site and, scrolling down the page, found the five top themes in the recent news, along with links that are accompanied by Alexa ratings for those news sources (if you want to focus on the most popular news outlets). Over time, you can see how these news themes shift, giving you a feel for what might be influencing portfolio managers.

2) Track Market Commentary - The blogosphere is especially useful as a way of taking the pulse of market opinion. Here the key is to focus on the most credible bloggers who themselves possess market expertise and/or manage money. Many of these well-informed sources can be found via the Seeking Alpha site, which regularly updates its content. Especially useful is the categorization of Seeking Alpha posts by region (U.S. markets, Global) and market (ETFs, Sectors). This makes it easy to scan posts on particular topics and look for your favorite commentators. Alternatively, you can track the Seeking Alpha page specific to each commentator and bookmark their contributions (here's my page, for example). Want to catch commentary from traders themselves? The Instant Bull site (from the creators of Newsflashr) pulls posts from market message boards and categorizes by topic, so that you can get a feel for trader "buzz". This is especially helpful when tracking themes relevant to specific stock names. Although it's subjective, I find that tracking commentary overall can be a useful contrary indicator: when the buzz on a theme becomes too dominant, we're often ready for a near-term reversal.

3) Track Markets and Asset Classes Other Than Your Own - My trading screen typically tracks the NQ, ER2, and ES futures on a one-minute basis, so that I can see if small cap and NASDAQ stocks are confirming moves in my primary market (the S&P 500 Index). As my earlier post emphasized, I also keep an eye on 5-minute charts of the various S&P 500 sectors, so that I can identify divergences that emerge during the day session. I also periodically look at charts of asset classes that affect the stock market, including currencies (yen is a favorite), interest rates (yield curve as well as rates for specific Treasury instruments), and commodities (oil, gold). Many times, these intermarket relationships provide overall clues as to whether market participants are mostly risk-seeking or risk-averse, which typically translates into bullishness or bearishness regarding stocks. I also like to track international markets--particularly during pre-opening hours--to get a feel for how markets are processing global news. It's important to have a data provider that can give you global market information on a real-time basis. Very often, you'll see a shift in a correlated market or sector (e.g., interest rates, yen, financial stocks) seconds before a corresponding shift occurs in the stock indexes. Those are useful "tells" for the short-term trader.

4) Track Economic Indicators and Expectations - You'd be surprised how many active traders don't know the economic news reports scheduled for the day or their significance. They blithely trade in the morning, only to get "run over" when a news reaction creates a violent short-term movement. Many traders listen to the financial news channels on TV simply to hear breaking economic reports; websites such as Briefing.com and Bloomberg are also useful in identifying which reports are scheduled during the day and what the expectations are. Very many times, you can identify when the stock market is in a trending mode vs. a range mode simply by observing how stocks (as well as interest rates and currencies) behave once an economic report comes out. If the report cannot move rates or currencies out of trading ranges, it's much more likely that any initial reaction in stocks will be reversed. The same is true for Fed announcements. Knowing ranges in the major asset classes and seeing how markets behave relative to those ranges when economic news hits is one of the most useful theme-builders for morning trading in the U.S., I find.

In my Twitter posts, I try to identify major themes affecting markets and provide a heads up for economic reports, as well as market indicators. Every trader, however, depending on market and time frame, has to find user-friendly ways of detecting market themes of greatest relevance. Many, many traders grow frustrated and trade poorly because they don't see market moves coming. They are so busy watching their market that they don't see the themes shifting around them. In trading it helps to have binoculars as well as a microscope. The big moves are dictated by the big picture, and that picture is always changing.

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