Investor Education: Buy When Market Indexes Are In An Uptrend

You can argue both sides. But the key point 19 that stocks fare best when the overall market is strong.

Three out of every four growth stocks follow the general market's direction. That's why a key lesson of stock investing is to stay in sync with the major indexes.

Decades of research support a strategy in which you buy stocks only after at least one of the indexes has staged a follow-through day. That's when the market confirms a fresh rally by surging about 1.7% or more, with an increase in volume over the session before.

Every rally eventually ends. A distribution day occurs when one of the major indexes falls on heavier trading than in the previous session. Three to five distribution days in a span of a few weeks should make investors wary and consider raising cash.

Breakdowns in leading stocks are an even stronger indication you should stop buying and take profits.

Where are we now? You can get a quick take in just a minute or two. First, look at the daily Big Picture column and its Market Pulse feature. You'll find out whether the market is in a confirmed rally or in a correction. You'll also get a feel for how the market's leading stocks are faring in the "Leaders up in volume" and "Leaders down in volume" sections of the Market Pulse as well as in the daily column.

You should also check the Real Most Active column, which appears on the cover of the Making Money section Tuesday through Friday and deeper inside the section on Monday.

What about the stocks you own during a market tumble? If a stock that you bought surged 20% or more during the first one to three weeks after its breakout, try to hold for eight weeks. If you're sitting on big gains, consider taking some profits. If your stock is falling sharply or is threatening to round-trip from a gain to a loss, sell it.

When industry leaders sell off, it's a good bet that others in the same group will go down too.

A follow-through is merely the first step in seeing the market re-establish its strength. Next, you want to see multiple up days occur in brisk trade, confirming the follow-through. If conditions are fertile, top-rated stocks should start breaking out of bases.

IBD's Big Picture column and Market Pulse track the action of the main indexes and leading stocks.