Wall Street loves a good story, and one of the best ways to
anticipate moves in the market is to think like a storyteller.
After all, any story has a narrative. Characters go from point A to
point B. Some things change while others remain the same. Boy meets
girl, they fall in love and get married. That's a change.
But other things--perhaps their parents or personality
The same is true at any moment in the stock market: Chemical stocks
have been running since the summer while most banks and financials
have been dead in the water. Earlier in the year, refiners were
stuck in a rut while retailers were moving straight up. And now,
most emerging-market stocks are in the doldrums, even though chip
companies that rely on those same countries for growth had been on
Sentiment moves from one sector to another, and these shifts are
often far more important than anything "fundamental" at a company.
For instance, Owens Corning has had nothing but bad news on the
earnings front of late, missing forecasts and cutting guidance the
last time it issued results on Oct. 27.
However, the company makes construction supplies--most notably Pink
Insulation--and the entire homebuilding sector has been rallying.
As a result, OC is up 19 percent in the last month--more than 4
times better than the S&P 500 in that same period.
What I am saying is nothing new to anyone who has watched the
market for a long time. My point is that these shifts can be
anticipated and can make you money in the process.
The market will give you clues--just as a screenplay writer or
novelist will foreshadow what's coming next in the story: A man and
woman meet in a film and a romantic score starts playing. Or the
girl is going into the haunted house at midnight as the zombies
await, and the scary music begins.
The stock market gives similar clues. Homebuilders such as Lennar
and KB Home were making incrementally higher lows since August
while employment and consumption were improving. Stocks like OC had
literally gone nowhere for a year and were sitting near support. It
turns out that they had nowhere to go but up, and up they went.
A similar pattern surfaced over the summer in "cloud computing"
companies that manage data centers for big enterprises like banks
and governments. The industry is now in the midst of a long-term
boom because it provides a more efficient way to handle
information. Major players such as EMC and NetApp have been
rallying hard since early 2009, and the bullishness has shifted to
other names from time to time since then.
The most notable example of this was in 3Par, a hardware maker that
had done a whole lot of nothing until it triggered a bidding war
between Hewlett-Packard and Dell in August. As that takeover saga
unfolded, other stocks such as Compellent Technologies and
Rackspace Hosting emerged from obscurity and have made some
investors very rich in a short time.
Similar patterns occurred in the gold miners recently, where
so-called "junior miners" have outperformed their larger rivals.
The reason is also M&A: Big miners have limited growth
potential, so will (hopefully) buy smaller companies whose deposits
are not fully valued.
Another example was James River Coal. Other coal miners were
climbing, but JRCC was stuck in the mud. Then suddenly, it went
from $17 to $25.
Did anything fundamentally change with the company? No, this was
simply its time in the narrative to move.
This is a different way of looking at the market from what many
people espouse--at least publicly. Most portfolio managers talk
about formulas like P/E ratios, and these things do matter over the
long run. But here at optionMONSTER, we're traders. There is much
more money in timing sectors and judging shorter-term sentiment
than in trying to value a company correctly using financial
(A version of this article appeared in optionMONSTER's Open
Order newsletter of Dec. 23.
Chart courtesy of tradeMONSTER.)
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