Strive for 25 - #1a. Defining Your Market
Defining Your Market
In the previous post, we covered how important it is for the market to be in a confirmed uptrend when buying individual stocks. The Strive for 25 uses the $SPY & the $QQQ as the definition of the market. However, what you define as the market can vary depending on your strategy and goals.
The Market
The $SPY is the universal definition of the market, but I have traditionally preferred to use the $QQQ as the definition of my market. My strategy leans towards high growth and technology stocks which is better represented by the $QQQ instead of the $SPY.
When evaluating the #1 criteria in the Strive for 25, I look to see if the $QQQ is in a confirmed uptrend based on our previous definitions of higher highs + higher lows. Before I buy a stock, I want confirm that the market is in an uptrend.
My Market
More recently, I’ve taken it a step further and have been defining my market as $ARKK. The ARK Innovation ETF holds stocks that are high growth and focus on a theme of the future (Strive for 25 #5, which we’ll cover later). The $ARKK ETF has represented the style of stocks that I lean towards buying and thus is a perfect market for my strategy.
Outperforming Your Market
The goal for most active traders and investors is to outperform the market. In most cases, this means outperforming the $SPY. However, in 2020 the $SPY was up 18%, the $QQQ up 49% and $ARKK up 152%. That’s a drastic difference in returns depending on how you define your market.
By defining your market you can have a realistic chat with yourself based on your trading or investing performance. Am I beating the performance of my market? If not, should I just buy my market’s ETF and make my life easy? Or do I enjoy attempting to beat my market and believe I can figure it out over time?
These are simple starting questions that every trader and investor should continually ask themselves. If your hard work in being an active trader or investor is not leading to your portfolio outperforming your market you need to have a pragmatic chat with yourself. If I’m not beating my market should I just buy my market, sleep easy, and have time to pursue other ventures?
It’s tough to face these facts, but we’re here to make money not have a good time. Look yourself in the mirror and be honest.
How to Define Your Market
The best way to define your market is to look at your past trades. Were you buying $AMZN? Maybe $BRK/B? Or even $FSLY? By analyzing your past trades you can identify a market or ETF that best fits your trading or investing style.
The graph above comparing the YTD 2021 returns is a perfect example of why you need to think carefully about defining your market. Not all markets go up at the same time. In fact, there can be major divergences in returns between different markets. If you primarily buy stocks that are held by the $ARKK ETF, why would you base your definition of an uptrending market as the $SPY?
In February and March of 2021, $ARKK started dropping quickly while the $SPY rebounded and started to go up. If you defined your market as the $SPY but held mainly $ARKK related stocks, you would have experienced a divergence in performance between the $SPY and your market. Defining your market as the $SPY when you heavily trade or invest in $ARKK type stocks would have led to a false sense of hope.
If you simply switched your definition of a market to $ARKK instead of the $SPY, you would have been able to identify wayyy earlier the downtrend that was emerging in $ARKK and thus your portfolio.
Properly defining your market is critical to trading and investing success.
In the $ARKK vs $SPY scenario, once you identified that your market was changing from an uptrend to a downtrend, the next question arises – what is your time frame?
We’ll dive into this question in the next post - #1b. Defining Your Time Frame.
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