What should you have in your watchlist? A watchlist is a list of securities to “keep your eye on” so that you do not have to start from scratch with each investment. But what should go in your watchlist, and how should they relate to one another? Here are a few ideas and guidelines you can use to give you a simple watchlist from which to start.
1. The US Dollar and Bonds
The U.S. Dollar is arguably the most important asset in the world, because it is the largest and most liquid of all the global currencies. By keeping the U.S. dollar in your watchlist you keep an eye on the largest domino. A good proxy for the U.S. Dollar can be using the Exchange Traded Fund (UUP). UUP is a Powershares US Dollar fund that tracks the performance of the US Dollar index (TLT). The US Dollar index is the value of the US Dollar relative to other major global currencies. While looking at the US Dollar index, it is also helpful to look at the performance of the US Bond markets. TLT is the iShares 20-year treasury bond ETF, and it serves as a proxy for all other us treasuries. While the correlation “when bonds go up the market goes down” is not always true, it can give an indication of bond-price movement overall, which is very important for an investor to know.
2. Major US Markets
The largest and most liquid equity markets in the world are the US equity markets for several reasons, which is why every investor should look at the big picture markets before making any investment decisions on individual stocks. The most important of all markets is the S&P 500 (SPY), since it contains almost 80% of the total US market capitalization. An effective proxy for the S&P 500 can be the Exchange Traded Fund SPY. However, even though the S&P 500 is the largest market, it is not always the quickest to respond to major market and economic shifts. As a more responsive major market view, it might make sense to also have the Nasdaq Exchange Traded Fund (QQQ) and the Russell 2000 Exchange Traded Fund (IWM) on your watchlist. These are large cap growth and small cap stocks that tend to move more rapidly and respond faster to market fluctuations.
3. Gold, Black Gold and Copper
Commodity markets inevitably influence stock markets. Raw materials in Housing, Technology, Infrastructure and other industries will influence the profits of all of those companies, even if it is a few months down the line. Many people will attribute part of the recent explosive growth in technology stocks to the lower price of gold as a raw material to produce the products. There will always be a lagging effect in the raw material pricing relative to the price of underlying stocks using those materials. The Exchange Traded Funds of Gold (GLD), Oil (USO), and Copper (JJC) can help many traders and investors to see trends that may form in the Technology, Energy and Housing industries.
4. Stock Market “Fulcrum” Stocks
A fulcrum is a point at which something pivots, and in the stock market there are fulcrum stocks which will help to pivot the whole market. While these stocks will often change, a good way to evaluate would be to look at the top holdings of the major market ETF’s we spoke about in section #2. As of this article’s publication date, the top stock in the QQQ and SPY holdings is Apple (AAPL), and the top stock in DIA holdings is Boeing (BA), which is followed closely by Goldman Sachs (GS). Microsoft (MSFT) and Amazon (AMZN) also make up large holdings of the QQQ and SPY; so both could also be considered fulcrum stocks for the purposes of your watchlist.
5. What Interests You!
One other very important element of stock market watchlists is the element of interest. As an investor, it is important to have on your watchlists things that interest you! Investing in companies that interest you can help to make the investing experience more enjoyable and, more importantly, keep an investor engaged. This can be a slippery slope which can lead to emotional investing; so be mindful that your emotions should not dictate your trading and investing decisions.
Summary of a Watchlist:
Here is a summary of the securities we have mentioned for your watchlist before you add the ones that interest you.
UUP, TLT, QQQ, IWM, SPY, JJC, USO, GLD, AMZN, AAPL, BA, GS, MSFT
Just remember to keep your watchlist to a manageable number and keep it under 25 securities; so you will always have opportunities but not be too overwhelmed by looking at too many things.