If You're Watching the Indexes, You're Watching the Wrong Thing
The indexes are for show and don't tell us what is really happening with the stocks we're holding.
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The financial industry and media spend a substantial amount of time, energy, and money trying to time the twists and turns of the market. There is constant talk about potential tops or major bottoms. Calling turning points in the market is a never-ending competition, and very few people do it very well.
Because of all the time and attention that market timing is given, it isn't too surprising that most investors believe that they should also be participating in this activity. If Wall Street is so focused on calling market turns, then shouldn't everyone?
The reality is that most investors probably cost themselves money by trying to time the market. There is a strong tendency to call market tops too early and to end up underinvested as the prevailing trend continues. As Peter Lynch once said, "Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves."
The primary problem is that investors are focused on the wrong thing. If you are trading the indexes, then it makes sense that you try to time entries and exits with some degree of precision, but most investors are not trading indexes. They are trading individual stocks, and those stocks are often not correlated with the movement in the indices.
As of April 2025, the Magnificent Seven stocks make up about 25% of the total market cap of the S&P 500. The 50 biggest stocks in the S&P 500 have a market cap about equal to 450 smaller stocks. In other words, the indices are basically just a measure of a small group of very large stocks. They are not at all reflective of the "average" stock. So why would you time entries and exits in individual stocks using an index that has little correlation with the stocks you are holding?
The main reason that investors think they should use indexes for timing is because that is the conventional wisdom, and that is what institutional Wall Street does.
The Better and More Logical Approach
The much more logical approach to market timing is to time entries and exits based on the individual stocks that you are holding. Forget the indexes. They are not providing the most important information that you need to determine if you should sell or buy stocks. There are times when the action in stocks is highly correlated, especially when there is a major news event.
But the better way to time the market is to let your individual stocks determine your market exposure. When conditions are good, you will find many individual stocks to buy. When conditions start to erode, your stop-out points will be hit and will reduce market exposure. Also, when market conditions deteriorate, there will be fewer favorable chart setups, and you will accumulate higher levels of cash while you wait for charts to improve.
By managing your individual stocks based on their technical patterns, you will effectively time the market without even looking at the indexes. One of the great benefits of this is that there is less likelihood of having an emotional reaction and making a bad decision because you are listening to the financial media that only talks about indexes.
To effectively apply this approach requires some strict technical rules. The focus has to be on price action, support levels, and other technical indicators. The biggest and easiest mistake to make is to use fundamental and valuation arguments to justify holding a stock that has committed a technical breach.
Monitoring individual stock behavior for breakouts, volume spikes, or resilience during market downturns will allow you to make timely entries when stocks show strength. Make exits when momentum fades, or technical signals like moving average crossovers or resistance levels suggest a reversal. Technical trading isn't simple, but it is the best way to time entries and exits.
Forget the indexes; they are for show. Focus on trading individual stocks if you want to make dough.
At the time of publication, DePorre had no position in any security mentioned.
