‘Top Down’ Strategy Finds Outperforming Stocks


Simpler Trading Team

Dec 16th 2022  .  4 min read

With central bankers holding the line fighting inflation, has the stock market given up hope for a rebound?

The Federal Reserve hawkish decision this week to continue raising benchmark interest rates indefinitely was a punch in the nose to the stock market which continued bleeding on Friday. This was the second week in a row for losses across the board.

What does the sharp sell-off mean to retail traders working their way through this uncertainty?

For savvy traders this harsh selling may lead to “top down” trading opportunities.

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Start targeting ‘the symbol’ to find outperformers

Hope seemed lost on Friday as the stock market gapped down early.

The Dow was down by more than 400 points in late morning selling and more than 525 points by early afternoon. All three major indexes were down at least 1% at the time, and 1.5% in the early afternoon.

Into the final hour of trading, all three major indexes recovered chunks of the earlier losses but still fell short of positive territory.

At the close today, the Dow was down to 32,920.46 points to lose .85% (dropping x281.76 points on the day). The Nasdaq dropped to 10,705.41 points for a .97 % tumble while the S&P 500 took the brunt of selling, losing 1.12% to 3,852.13 points.

Retail traders can lose confidence for opportunity in this type of downtrending market where it seems “big players” and outside influences, such as the Federal Reserve, are weighing against the stock market.

What is important in this type of environment, according to Raghee Horner, Managing Director of Futures Trading at Simpler Trading, is to stop talking about “the market” and focus on “the symbol.”

First, what does “the market” mean?

“The market” generally refers to overall elements of the stock market such as indexes, stocks, and futures. People tend to interchange the words to mean the broader trading world.

“The symbol” refers to the specific assets within the overall market and can include a specific stock, future, or an exchange traded fund (ETF).

“This is what I’m focusing on – be specific to the symbol,” Raghee said. “Let’s not think about ‘the markets’ because in the situation we’re in right now certain corners of ‘the market’ – stocks, currencies, treasuries, energies, metals – are stronger than others.”

‘Top down’ approach identifies specific trading targets

Leaning into this “top down” perspective can lead to potential trades no matter which way price is moving in the broader market.

“There’s a lot to like,” said Raghee.” It’s very exciting to be a top-down, futures oriented trader who understands macro economics. Which is to say, yields are moving lower and that should be bullish overall for equities.”

“So let’s not think all is lost because there is a big down day today,” Raghee said. “Let’s think about where the pullbacks are actionable.”

An actionable area Raghee targets is the Dow Futures. She is seeing “buy the dip” possibilities in sectors that have weathered gaps down in the overall market.

“The components within the Dow are generally stronger and more focused,” Raghee said.

Following along with her top down approach, Raghee then looks to specific symbols within these sectors. She focuses on “relative outperformers” within the sectors.

Relative outperformance refers to the performance of a particular index, sector, or asset (stock, future, or ETF) relative to benchmarks in the same area. For example, if an ETF gained 20% over the past year and the benchmark ETF gained 10% over the same period, that ETF is considered outperforming the benchmark by 10%.

“Start with the broader index, like the Dow, then to the sectors, then to the individual stocks,” Raghee said. “This is how we find relative outperformance.”

Raghee pointed to sectors considered to be outperforming, such as healthcare, industrials, and transportation. From there she digs further to find outperforming stocks, or symbols, within these sectors.

Top trader builds an ‘outperformer’ watchlist

To help her identify outperforming assets, Raghee maintains a watchlist and regularly updates it based on ever-changing market conditions.

“This is prioritizing the relative outperforming sector and then we prioritize the relative outperforming stocks,” Raghee said.