Who’s Winning in this Market Right Now

“Ahead of the Street” Column, by Mitchell Clark, B. Comm.

If you’re an investor wanting to buy stocks, waiting for earnings can be a long, drawn out process. Large-cap companies have the infrastructure to get their numbers out quickly, while smaller companies need more time to work with their auditors. This is why small companies tend to report well after earnings season begins.

It’s a trader’s stock market now and it will likely remain this way well into 2010. As evidence, the choppy price movements in the main indices signal a market that is willing to move, but is more unsure of itself for the long term. For individual participants in the stock market, evidence of a trader’s market is clearly illustrated by the action at brokerage firms.

Take TD AMERITRADE Holding Corporation (NASDAQ/AMTD) for example. This well-known discount brokerage recently reported its earnings, and a significant increase in trading-based revenues. The company cited that, in its fiscal fourth quarter, it processed some 35% more trades per day on average for a total of 410,576. Trading based revenues grew a substantial 38%. That’s impressive growth in any market and it illustrates that individual investors are back participating in stocks.

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Still, I don’t know of any Street analyst who is making a bold prediction about a higher stock market in the future. Nobody, it would seem, wants to be left holding a deflating bag. So, what we’ll likely get over the next several months is choppy, range-bound trading, without much direction at all.

In a trader’s market, success is rewarded and failure is punished extremely fast. It also means that successful stocks will be much more likely to experience bandwagon price moves. The buying high and selling higher strategy is most prevalent in a trader’s market and momentum investing becomes a worthwhile endeavor. We’ve seen this a lot over the last two quarters with U.S.-listed Chinese stocks. Within this group, those stocks that have done well have tended to do extremely well. There really hasn’t been any middle ground. Either a stock has languished or has gone up tremendously.

In a trader’s market, the brokerage firms and the tax man lways win. One thing’s for sure; it’s tough being consistently successful at buying and selling stocks. In this market right now, it’s very difficult to buy low and sell high. The market has moved too much and the successful companies are fully priced. Right now, the name of the game is price momentum, wherever it exists.