How to Check Market Pulse and Buy Best Stocks in Australia?

Summary

• Stock market investment needs proper analysis of the market trends, business fundamentals, and ability to spot significant opportunities.
• One needs to analyse charts to understand the current pattern of the market and gauge which are the sectors that are growing fast.
• Once the investor decides the best sectors for investment, the next step is to analyse data and determine the best stocks in those sectors that can bring more gain, a process known as top-down approach
• For picking the best stocks, one can analyse price appreciation, how the stock performed in different timeframes, as well as liquidity, price, and other factors.

Investing in the stock market needs thorough research and understanding of how the market works. There is no hard and fast rule that one can follow and make the profit, as the market is sensitive to various factors.

Stock market investment is risky, and if one invests their money without proper planning, it can be wiped out in a few days. New investors specifically need to be extra careful and should take appropriate advice before investing their money in equity markets.

Share market is inherently volatile. If it goes up and makes the investors earn huge, it can quickly plunge as well, making investors suffer huge losses. Especially in the current times, when the global economy has been badly hit due to the prolonged Global Virus Crisis (GVC), the market has been more volatile and sensitive. However, even amid this situation, few sectors have been thriving such as technology, healthcare, and e-commerce.

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How to Analyse The Next Significant Opportunities?

Investors always focus on analysing from where significant gains can be made, and which stocks have the potential to grow. However, for this, one needs to study the metrics impacting the sectors, look at the past data to see how each industry has unfolded to date, and so on. All these fundamentals give a fair sense of what to expect in the future.

The process might appear challenging to new investors, but it is needed to be done as the first step. These metrics include – P/E ratio and Earnings Per Share (EPS) for short, medium and long-term information, interest rates, currency movements, dividends, etc.

The investors must explore charts to understand market trends. Proper study of charts within the given timeframes will help in identifying the sector or stock trends. The market trend helps in identifying whether it has been in a bull market phase or bear market phase. Even in an uptrending market, not all stocks go up; hence, one should be able to identify the stocks that can deliver the expected returns.

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How to Identify Sector Leaders?

Traditionally, the Australian stock market has been associated with 24 sectors. However, GICS (Global Industry Classification Standard) covers 11 sectors from these 24 industry groups, 69 sectors, and 158 sub-industries that comprise 43k companies, globally.

When one determines the most promising industry to invest in through the metrics and chart analysis, then they can analyse which are the best stocks to park their funds. The process of doing so is same - look at the charts of different timeframes and then decide.

Once the sector has been decided, one should know that not all stocks in that industry will deliver the expected returns. So, analyse the ones that are outperforming the others. Also, to pick the best stocks from sectors, consider the price appreciations over multiple timeframes. As stocks that are doing well continue to do well in the future also, this is not a rule but a general observation. Popular belief among those who follow momentum trading.

The other factors one should consider while selecting the best stocks are - liquidity (look for more liquidity) and price. The criteria should not be to discard the high-priced stocks immediately, analyse well before doing so.

Traditionally, investors have been advised to diversify their portfolio across a broad range of sectors to minimise the risk. In such portfolios, even when few stocks fall, the loss could be minimised.

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Use Advance/Decline Ratio (ADR)

ADR is a technical analysis tool and a popular method used to gauge the strength of the stock market. The stock market is full of uncertainty, and during the present times, it is more volatile and uncertain, so this tool can help one to be armed with adequate information to make a decision.

Advance/Decline Ratio (ADR) compares the number of stocks that traded higher against the stocks that traded lower on a particular day than their closing price of the previous day. ADR calculates the ratio of the number of stocks advancing to the number of stocks declining. It can be calculated for various time periods - one day, one week, 15 days or a month. It is a powerful tool for gauging the real direction and sentiment of the market.

For instance, if on a particular trading day, number of stocks advanced stood at 1,500, number of stocks declined is 1,000, and assuming that 100 stocks remained constant, then A/D ratio can be calculated as 1500/1000 =1.5.

Overall Macroeconomic Vs Microenvironment

The share market performance is affected by a host of factors that also include the macro and microenvironment.

Macro-environment is related to the economic conditions that get affected by fiscal policy, monetary policy, inflation, GDP, employment rates, and consumer spending. It directly impacts business decisions on borrowing, investing, and spending.

Micro-environment factors are those factors that are close to a business such as media, competitors, shareholders, customers, employees, and suppliers. These factors directly influence the regular business activities.

Any changes in macro and microenvironment have a significant influence on equity markets.

There are various factors that one needs to study well before investing in stock markets. Since the onset of COVID-19 pandemic, the market has been volatile and highly uncertain. However, still, it has been offering multiple opportunities.

On 24 September 2020, the benchmark index S&P/ASX 200 closed the day at 5,875.9, down by 0.81 per cent.