Morning Market Thoughts
Good morning. Yet again, we’re looking at a strong opening in equities, with the 10 year yield being down to 1.56%. If folks start ramping up their bond purchases, at some point they’ll be paying the banks for the opportunity to lend them money. Trust me — that will be an unhappy day.One thing I was thinking about this morning is how to spot the sector leaders earlier rather than in hindsight. Spotting them early enables you to make money. Spotting them late enables you to say that you would have made money, but you didn’t see it in time. You’d be able to point to the chart and specify exactly where you’d have bought the stock, and how much money you’d have made if you had only seen it earlier.
Well, one method to find the early movers is to start comparing lows when the overall market is selling off. During the 4th quarter last year, most sectors were diving, and the decline picked up steam in early January. Seemed like every sector was going to
Earlier this year, none of the sectors were doing very well, and it was apparent that bottoms were starting to be formed. Let’s look at a few:
XOP — Formed a double bottom on February 24th. It’s now run 50% in 4.8 months.
SOCL — Feb 11th bottom. Up 40% over 5.3 months.
XLV — Feb 9. Up 18% in 5.3 months.
XME — printed a bottom on January 20th and never came back to test. It’s now run 138% in the ensuing 5.8 months.
XLI — printed a bottom on January 20th. Over the next 5.8 months, it’s up 25%
Here, the best performer was XME. It hit a “V” bottom and started climbing. Ultimately the ETF more than doubled, running 138%. Note that XLI bottomed on the same day. It only advanced 25% — so much for perfect rules.
The other sectors have done ok, posting double digit returns. But you can see that they hit their bottom later than XME and XLI. So one would think that the last to the bottom would be seen as the strongest sector, right? Well, that’s the wrong way to look at things. The FIRST ones out of their bottoms are the strongest sectors. They are the leaders. The ones that have not yet bottomed are the laggards…and there is a reason for that. Investors are eager to buy stocks that have hit their bottoms — they’ve been waiting for something to buy, and they find it in the early bottomers. So their buying begs more buying as more investors see what’s going on. It’s the “3 Day Rule” concept being played out over a long period of time.
So in the future, when we see stocks start competing with each other for money, let’s look at the stocks and sectors that were the first ones off the blocks. The ones that get the earlier starts are likely to cross the finish line first. And if you’re in the winner’s circle, you get the gold medal.
See you in the forum.
Dan Fitzpatrick
Market Update