Leadership stocks and Lagging stocks

Leadership stocks and lagging stocks can be helpful to look at when trading the market. These are stocks that are performing better then the market and worse than the market.

The lagging stocks on the other hand are stocks that have done worse than the market for a given time frame, either a day or longer.

It is important to pay attention to this because comparing how a stock did when compared to the market average can tell you a lot. If the S&P went up 2% today but stock XYZ only went up .2% it can tell you that this stock does not have much buying pressure.

Because of this it can tell you that the stock probably only went up because the market as a whole went up. If the market stays flat or goes down stock XYZ will be more likely to crash then other stocks. If you are trading a stock that severely under performs the market you may want to tighten your stop level so you get out quicker if things turn sour.

I never exit stocks that are severely under performing just because they are under performing. You simply do not know what will happen. Buying pressure could come in the next day and drive the price of that stock 10%. Even though that does not cause me to sell my position it can cause me to move my stop up.

However if the S&P goes up 2% and the stock ABC goes up 4% that could be a sign that stock ABC has a lot of buying pressure and will continue to outperform the market in the short term. I never enter a stock just because it is outperforming the market, but if it has just broken through resistance or bounced off of support in addition to beating the market in the short term that can be a good sign.

Determining whether a stock is leading or following the market can be interesting and help you gain confidence, but it should be used alongside other indicators.