Ever wondered what stocks make the best stock investments in the market? They are usually laggard stocks in an overall bull market!

If you consider a long term investment period, then markets can act in mysterious ways, and certain lagging – leading effects can take place among stock sectors. There are even economists who claim they can forecast market cycles by watching which market sector is leading at what time, and then work out a sequence of events that can tell you when the bull market will begin and when it will end.

I am not in a position to confirm whether this is true or not, but the leading – lagging effect certainly exists.

It does not matter what stock investments method you choose, you should always compare that stock’s recent performance against the market’s and see if it’s a leader or laggard, and also compare it against its sector.

Generally, in any market where a solid uptrend has been established, the worst performing stocks or commodities will eventually catch up with the rest of the market, in some cases this lagging effect can be enormously great, and it can even provide stock market arbitrage trading opportunities.

Leading – Lagging Effect

Imagine a market that has 20 component sectors and even though the whole market has risen say 10% in the last 3 months, there’s one particular stock in the most lagging sector that is historically strongly correlated to the rest of the market, but now has only rallied 3% in the last 3 months!

By buying that laggard stock and symmetrically going short with a futures contract on the whole market, you have created a risk-less spread that has a very high probability of making a profit.

• If the market drops too much you stand to win big on the short futures contract while the long stock will fall marginally, and much less than the market.

• If the market rallies further, the long stock will sooner or later catch up with the market percentage-wise, rally more, and you will still make an overall profit on the unequal price movement of the spread’s components.

Stock Investments For Long Term Gains

For long term stock investments, one is better off buying high quality laggard stocks, ideally ones with very high intrinsic value that have been lagging the market in its recent bull phase. If the markets continue to rally so will the stock in question, you can let the rest of the market lead the way forward.

Equally, this leading – lagging effect can tell you when to take profits, in case your long stock has rallied too much, has outperformed the market and it’s bound to have a correction. Even though it has excellent long term value, why not sell it at what appears to be an imminent correction, and buy it back later at a lower price?

The leading – lagging effect is more profound among sectors, rather than stocks of the same sector. If you do a little research you will be surprised at the opportunity that often arises from these unequal performance periods in the markets. By following some of the above tips, you could very well see your stock investments soar.

Stock Market Investing Strategies, Tips and Speculation by..
Scott Smith – Invest In The Stock Market © 2008 – 2010

Previous Post >>> Stock Market Speculation 26-30 July 2010