Wednesday, December 07, 2005

What Should I Trade?

On the Performance page of my site, I emphasize that trading performance is a function not only of how you trade, but what you trade. When TraderFeed reader Paulo de León pointed out that the NASDAQ averages were losing volatility relative to the rest of the market, it drove home the point that what constitutes the best thing to trade changes over time. I will have an article on the Trading Markets site later this week on the topic.

Here's a dramatic example. Since January, 2000, the S&P 500 Index is down about 13%. The NASDAQ 100 Index is down 55%. In that same period, however, the Russell 2000 average is up 38% and the S&P Midcap Index is up about 69%.

Moreover, volatility of the Russell stocks has been increasing relative to the S&P--unlike what we're seeing in the NASDAQ average. Volume in the MDY exchange traded fund (for midcap issues) has expanded several-fold since 2000. Yet we continue to see far more traders banging their heads against the S&P 500 and NASDAQ 100.

As this blog evolves, I will use it increasingly to identify what to trade, not just when to do it. It is not clear to me from the research I reviewed on my site that the big name stocks are necessarily the best trading--or investment--vehicles.