How this market can be like popcorn

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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 signals.

Popcorn 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 catch up.

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 that one!)

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.

MRO 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 up technically.

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 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: ITT , MRO

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