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The key to mastering the market and producing optimal returns is to understand the market’s character. The market is much like an individual with a personality disorder. It has huge mood swings, can be obsessive-compulsive, and will constantly shift its priorities. If you fail to adapt as the character of the market shifts, then you will be at a disadvantage when trying to find opportunities.

Traditional Wall Street recognizes this issue in a very simplistic way. The pundits focus on only two very broad categories – bull markets and bear markets. Bull markets are good, and bear markets are bad. The primary issue for institutional Wall Street is whether you should simply sit and wait out a bear market or take other action.

The reality is that the bull and bear labels can be highly misleading. The actual character of the market is much more complex than that, and you need to understand what matters most at any particular time.

It is much more helpful to think of the market as either index driven or stock driven. There are times when stocks tend to move in a highly correlated fashion, and there are other times when the primary focus is on news flow. Most index driven markets are highly sensitive to news headlines. It is the big picture issues that cause stocks to be bought or sold without as much regard to their individual characteristics.

Currently, the market is in a stock-picking phase. The news headlines are secondary, and the primary focus is on finding stocks that have good stories, good technical action, or strong price movement. The main concern is the merits of the individual names and the sectors they are in.

Earlier in the year, the character of the market was much different. It was still bullish, but almost all the gains in the indices were the result of strong action in the FATMAAN names. This was mostly index driven action. Nothing much mattered to the market outside of a few big stocks like Apple (AAPL) , Amazon (AMZN) , and Netflix (NFLX) .

Down-trending and bear markets are almost always index driven. The first sign that the market is in trouble is when it starts to ignore the merits of individual stocks. When the market starts to struggle, investors rush to raise cash and don’t’ care much about what they are selling. They simply want to protect capital by sitting on the safety of the sidelines.

Eventually, the indiscriminate selling will end, and that is when the stock pickers go to work. Many stocks will have been unfairly sold without regard to their merits, and that is when astute investors will step in and start to buy.

One of the most notable themes of the bull market in the last decade was that it was primarily driven by big-cap names that make up the indices. If you were not in those big-cap names, it was very difficult to keep pace with the gains in the indices.

Currently, we are seeing one of the best stock picking markets since the bubble days of 1999-2000. This is very troubling for institutional investors because they aren’t nimble enough to actively trade smaller cap stocks. Institutional investors have to look to the S&P 500 names and will almost always gravitate toward those that are the strongest and largest components of the indices.

There are many nuances to the character of the market beyond bull, bear, index driven, and stock picking. The most important is understanding which sectors are in favor. Sectors are always important, but even more so when stock picking is dominating the action, and traders are looking for themes.

Recently those traders that have identified themes such as SPACs, electric vehicles, bitcoin-related, solar energy, cannabis, gambling, work-at-home, reopen the economy, and several others have had a huge advantage over those that have stuck with the broader market action. These themes are always shifting, but they have a tendency to persist longer than many think is likely.

The market is not a single monolithic beast. It is a badly flawed creature that changes its mind constantly and is always looking for a way to separate investors from their money. If you want to master the market, it is helpful to think of yourself as a market psychologist. Look closely at the behavior that is taking place, not only in the indices but in sectors and individual stocks.

The stock market is not just an exercise in finance and accounting. It is all about understanding behavior and how it is constantly changing.

(Apple and Amazon are holdings in Jim Cramer’s Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells AAPL or AMZN? Learn more now.)