Investing in a rising stock market may sound easy, but there are important factors to consider. First, investors should not blindly throw money at just any stock or sector. Second, some investors need to overcome the notion that because they missed out on some upside that they are too late to the party. Investors can get in on the action in a rising stock market by using these ideas.
Identify Sector Leaders
In every bull market since the advent of financial markets, some sectors have shown more strength than others. These are what the pros would refer to as leadership groups. As "Investor’s Business Daily" notes, "Knowing which sectors are leading and which are lagging can give you a good feel for the market." Think of sector leadership this way: There is a reason why, in a rising market, some sectors are leading and others are lagging. More than likely there are negative reasons attached to the laggards, which means investors should embrace stocks that have already helped lead the market higher.
Use Advance/Decline Data
The Advance/Decline line is a technical analysis tool that measures the intensity of buying and selling activity. Another way of looking at the A/D line is that it can give investors a picture of just how voracious a rally really is. A rising market but a slumping A/D line is usually not a good sign. "When the equity markets are in a ‘bull move’ one thing investors watch is the Advance/Decline numbers to see if the rally has good participation, or if it is being driven by merely a few key stocks like it was in late 1999 and early 2000," according to research from Raymond James Financial.
Embrace Overbought Stocks
A common misconception among retail investors is that simply because a stock is overbought, it should be avoided. Conversely, a related misconception is that because a stock is oversold, it is a good buy. The reverse is often true in strong bull markets because leaders can remain that way for extended time frames while laggards can be doomed to the bottom of the barrel for months, perhaps longer.
Look For Rising Volume
This applies to broader market and individual stocks. Rising volume -- the number of shares traded in a given period -- in the broader market during uptrends confirms that more investors are being compelled to put cash to work in stocks. At the individual stock level, rising volume can be a sign that a stock is poised to rocket higher. For example, if a company has average daily volume of 500,000 shares, but trades more than 1 million shares a day for a week straight, that could be a very positive sign.
Todd Shriber is a financial writer who started covering financial markets in 2000. He worked for three years with Bloomberg News and specializes in analysis of stocks, sectors and exchange-traded funds. Shriber has a Bachelor of Science in broadcast journalism from Texas Christian University.