Remember the oil-fashioned way of making popcorn in a pot with
oil? As a child I used to wonder why some kernels popped before
others, and how they all knew to pop over the 3-5 minutes my mom
kept them on the stove.
This year is setting up to have a lot in common with a pot of
popcorn: There's a steady heat that will cause most sectors to
rally at one moment or another. While the broader market will
continue to grind higher, the real money will be made identifying
which sectors and individual stocks are ready to move next.
Fortunately, it will be easier than guessing when individual
kernels of corn are going to pop--especially with our analytical
tools at optionMONSTER combing the markets for buying and selling
One reason behind this environment is that the S&P 500 has
already made an incredible move since early September, surging from
about 1050 to 1280. It's now pushing against the same levels where
it peaked in August and September 2008 when financials were
imploding. Resistance levels like this do not simply yield because
they are long-term by nature.
Yes, the S&P might push a little higher to about 1310, but in
my view it's extremely unlikely to break this level until
longer-term moving averages such as the 50-day or even the 200-day
That doesn't necessarily mean we're going to have a full-blown
correction; I suspect that the broader market will simply pause,
while individual stocks and sectors take turns popping. After all,
there will be plenty of heat under this market.
The first factor is that the "melt-up trade" is still far from
over. Many stocks are still far below their 2007 and 2008 levels.
With a strong credit market, improving economy, and smaller
provisions for bad loans, many of these names will probably reflate
toward something approaching their old prices.
Financials are the main sector to watch for this trade, along with
shipping companies. (YRC Worldwide, which has faced bankruptcy
worries, might also be a candidate. But please do your homework on
M&A is also supporting the market, starting the year at its
strongest pace since 2000, according to Dealogic. And there is
record issuance in high-yield debt, which is used to finance
takeovers. In general, surging junk-bond sales correspond to a
strong stock market.
The next positive is a potential wave of spinoffs. We have already
seen this in companies like Marathon Oil, Motorola, and ITT, and I
believe that we will see a lot more because this is actually a
long-term secular trend that started in the 1980s and really began
to gain momentum in 2005-2007.
One more major factor is the emerging-market demographic story,
which will ignite bullish fires in one sector after another.
Recently it's been agriculture. At other times it will be oil, then
retail, then media, then distillers and brewers.
The good thing is that the heat on this stove is just right. There
is some worry about inflationary pressures in food prices, for
instance, but inflation won't become a major problem because of all
the slack in the U.S. economy.
At some point developing countries like China will stop worrying
about overheating and their cut interest rates, and then there will
be another emerging-market boom. The bulls will simply migrate to
find the most fertile areas.
These trends are thematic, so the waves of buying will sweep the
market sector by sector, story by story. So pay attention to the
names and industries that appear on the Heat Seeker and are setting
Each stock will have its day to pop.
(A version of this article appeared in optionMONSTER's Open
Order newsletter of Jan. 20. Chart courtesy of