Stock market investment strategies – Top down investing strategy

Top down investing strategy is a strategy in which the investor assesses the markets first and then the individual securities. This investing strategy is completely opposite to the bottoms up investing strategy. In bottoms up strategy the investors don’t care about the broader indices. They cherry pick the individual securities solely based on their performance. They keep it for a short duration and get out of them quickly as soon as they make profits. But in case of top down investing strategy, the global markets are first analyzed, then sectors and finally the individual securities.

This strategy is based on the premise that even the broader markets are doing well, the chances of making profits increases. The trend direction increases the chances of putting your money in a winning trade. The investors using this strategy follow a simple approach and their approach can be divided into four phases:

1. Analyzing the global market trend

2. Analyzing and identifying the strongest sector or index

3. Analyze and identify the strongest stocks within that sector

4. Lastly try to find the best time to invest

This is all easier said then done. Looking at the first phase, the investors usually look at the global markets. This is important since only local markets may not give the complete picture. They may not be experts in these markets but it is important to understand what is the market trend.

After identifying the global market trend they choose the strongest performing sector or index. This may not come directly from the raw percentage increment since last year. The investors need to look at the broader trend and determine a sector which has the least retrenchment during the bear runs.

Once the sector is determined, then they determine the strongest performing stocks within that sector. For this, the investors need to do a lot of analysis. They use various automated tools and websites to analyze and filter the companies. They look into the financial reports, earnings reports. They use technical analysis of stocks to determine which stocks have the greatest chances to give you best returns possible. On these tools, various stocks can be charted together which can show the trending of each of them simultaneously. This helps immensely in comparing different stocks in the same sector with respect to the corresponding index. They can see how these stocks performed during a particular bull run or a bear run. These tools and applications can made the life of an investor and analyst much easier.

The last phase of this approach is to try and time the market to enter into a long position. There is no easy way to do this. It is difficult to buy in a bull phase since the prices are always increasing. And it is difficult to buy in a bear run since the market sentiment is down and panic selling is taking place. The investors need to understand the stock trends and use methodologies like candlestick analysis or other techniques to find support and resistance levels for a stock before making the final decision.

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