Wall Street: The great storyteller


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 traits--don't.

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 fire.

OC 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 formulas.

(A version of this article appeared in optionMONSTER's Open Order newsletter of Dec. 23. Chart courtesy of tradeMONSTER.)

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

Copyright © 2010 OptionMonster® Holdings, Inc. All Rights Reserved.

This article appears in: Investing , Options

Referenced Stocks: CML , JRCC , KBH , LEN , OC



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