Sometimes referred to as a bellwether, a barometer stock is simply any stock or bond that has demonstrated a history of being a good indicator of the current market conditions. Barometer stocks also tend to be a good pointer in which direction the market is likely to go in the short term. Identifying a barometer stock takes some effort and time. Here are some tips on how to tell whether a particular bond or stock can be used as a solid indicator stock.
One of the things to keep in mind about all stocks and bonds is that there is some fluctuation involved. This may be with interest or dividends generated, or it may be in base value. While some stocks and bonds seem to respond more to factors that tend to be localized and not of much impact on the market in general, others types of investment stocks demonstrate a history of moving right along with the general condition of the market. These are the types of stocks that can be properly identified as a barometer stock.
In order to begin the search for a reliable barometer stock, it is necessary to learn how to research the upward and downward movements of a stock, and compare them to the same periods in the general market. The trick is to find stocks that move because of conditions, not because there has been a general change in the market. In short, a barometer stock is identified by a tendency to move due to a cause, and not due to the symptom of a changed market. Therefore, looking into stocks that demonstrate a change during or after a general market shift cannot be considered a proper barometer stock. Only stocks that made a shift just prior to the general market change would be worth looking into.
Second, one or two incidences of the performance of a stock shifting just before a general market change is not solid proof that the stock is a true barometer stock. Review the performance of the stock over a period of at least two years, and even longer if possible. At one time or another, just about any stock will exhibit some sensitivity to actions that ultimately cause a shift in the market. Instead of relying on a couple of simple coincidences, make sure you consider stocks that have demonstrated a consistent pattern of anticipating market changes over an extended period of time.
