Measuring Market Strength: Technical Analysis 101

BALTIMORE (Stockpickr) -- There's an old saying on Wall Street that "it's a market of stocks, not a stock market." In large part, that's true. Single stocks often trade in directions that are divergent from the broad market; identifying those divergences is the domain of the successful trader.

But it's a huge mistake to underplay the importance of the stock market as a whole.

Clever sayings aside, the vast majority of stock movements are highly correlated with one another and with the collective market itself. That fact has become more evident than ever in the last few decades, as index funds became the most popular investment choice for Americans' retirement portfolios. With exposure to a diversified basket of stocks that's designed to track "the market," these funds are directly impacted by losses in the big indices they track.

Practically speaking, it makes a lot of sense that most stocks trade in tandem. It has more to do with the flow of funds into and out of the market than with the specifics of any particular stock. As investors tried to liquidate stock positions and free up cash in the recession of 2008, for instance, they were selling the good alongside the bad in order to stay solvent. In the process, even fundamentally sound stocks got pushed significantly lower as the broad market crashed.

But you don't need to be beholden to the market. By measuring market strength, you can target asset classes that look to be the strongest performers when times are tough, and you can spot early signs of broad market reversals when times are good.

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