It’s Not a Stock Market

“It’s not a stock market, it’s a market of stocks.”

-classic Wall Street maxim

There are generally two ways you can approach investing in the stock market.  

A top-down approach means you start at the macro level, evaluating broad market conditions and then identifying sectors and stocks that should do well given your macroeconomic assumptions.

A bottom-up process means you start at the stock level, looking for compelling themes and investment opportunities, assuming that strong companies will lead to strong performance regardless of the macro environment.

In practice, many equity investors employ some combination of the two approaches.  There are times when it feels like everything is following the action in the major averages.  Or as one of my mentors loved to quote, “A rising tide lifts all boats.”  Other times, we can find plenty of individual stocks and groups forging very different paths, and it feels more like a “stock picker’s market.”

I’ve found market breadth indicators to provide a powerful link between the top-down and bottom-up disciplines.  These indicators help us understand how the action of a major equity index relates to the movements in all the stocks that make up that index.  And I’ve learned that when there is disagreement between these indicators and the S&P 500 index itself, then it’s time to be more cautious in my investment approach.

Despite the fact that both the S&P 500 and Nasdaq 100 have achieved new all-time highs in September 2025, only about 55% of the S&P 500 members currently sit above their 50-day moving averages.  So that means about half of the S&P 500 constituents are nowhere near a new all-time high.

The beauty of a technical analysis driven approach is that we don’t have to assume what’s going to work or not.  We don’t even need to know whether the major benchmarks are going to move higher or lower.  What we need to do is watch the evidence, and listen to the message the markets provide back to us in the form of price action.

Mindless investors worry about what will come next, and stay so focused on a top-down or bottom-up approach that they have huge blind spots in their process.

Mindful investors know that it’s important to assess broad market conditions, but it’s also vital to use charts to identify the stocks and themes showing a change of character.

RR#6,
Dave

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Disclaimer: This blog is for educational purposes only and should not be construed as financial advice.  The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional.  

The author does not have a position in mentioned securities at the time of publication.  Any opinions expressed herein are solely those of the author and do not in any way represent the views or opinions of any other person or entity.