Stock selection for your trading strategy is relatively easy. The fundamental analysis is done for you free. Yes, all the hard work has been done for you by the many experts employed by the large trading houses. You only need to know the name of the stock. You do not have to worry yourself about earnings, results, what your broker or wife thinks about the stock or even what the company makes. You can apply this principle to any of the stocks that make up the parent index. It is these stocks that will be actively traded by the trading syndicates and market makers.
Any stock that is one of the constituents of an Index will have a active professional interest. That is, these stocks are actively being traded by market makers and professional institutions. This is good news for us because we can see the results of their activity. This is the key to stock selection. It is not necessary for you personally to have go into detailed fundamental analysis of these stocks. We assume that the fundamentals are in place and are being reflected in the current price levels. You are then looking for a stock that has a high 'perceived value' to professional traders that are active in the stock.
To select this stock you need a bench mark, something to compare it with. The parent Index is your bench mark. As the parent Index falls, most stocks will fall with the Index to some extent. However, you will notice that some of the stocks are reluctant to fall, resisting the decline especially near the lows of the market. This hints that these stocks are potentially bullish. Professional money that is active in the stock is telling you directly "yes, this is a good stock because we are not selling it, in fact, we are buying it". This is why the stock is refusing to fall with the Index.
Weak stocks will have no support from the major players and will fall easily, while at the same time are reluctant to go up with the index. You will see this principle at work constantly. Few people seem to be aware of this simple approach.
