Rev Shark:
"Character cannot be developed in ease and quiet. Only through experiences of trial and suffering can the soul be strengthened, vision cleared, ambition inspired and success achieved."
-- Helen Keller
Success in the stock market depends heavily on the ability to uncover and understand its changing character. The major market indices tell only a small part of the story. It is the development of new trends, the shifting between sectors and the more subtle responses to the macro economic and political environment that tell the complete story of the market.
Catching developing trends at an early point is the way to produce big profits. A couple of good examples are the rise in oil that started at the end of 2003. Riding that wave throughout 2004 would have guaranteed a great year. Catching the top in semiconductors in January was another very profitable trend.
Not all trends or themes last as long as those two but they usually play out over a long enough period that the gains can be quite substantial if you aren't too slow in uncovering them.
Throughout most of the summer the dominate theme was the continued strength in oils as well as "old industry" stocks like steel, farm equipment and trucking. As those groups dominated, other key groups -- technology, retailers, biotechnology -- did little, if anything.
We are starting to see signs now that some of these trends are reversing. For example, steel stocks have broken down badly over the past several weeks while many technology stocks have found support and even turned up.
As I discussed yesterday, conditions look ripe into the end of the year for a rotation out of "old industry" stocks and into technology. The market's traditional year-end strength is one key factor that supports this view. When the market is strong, investors tend to gravitate toward the fastest-moving stocks and those tend to be technology.
That leads to a second factor, which is that fund managers who need to bolster their results quickly tend to pursue the high-beta technology stocks. Nothing moves faster and better than a technology stock with momentum.
The third factor supporting a rotation into technology is technical considerations. The defensive, old industry stocks are very extended compared to technology stocks. I was a bit surprised to look at the Intel (INTC:Nasdaq) chart recently and conclude that it was pretty attractive. There is good basing action since the gap down in September and it is slowly turning up as it moves through the 50-day simple moving average.
Technology rotation is the theme I'm focusing on right now. I don't expect it to be smooth but there are promising signs that it is developing.
We have a mixed open to start the day with technology stocks showing strength and the DJIA and S&P 500 struggling a bit. eBay (EBAY:Nasdaq) had a good quarter and is trading up strongly this morning on a couple of upgrades despite cutting its 2005 forecast. There seems to be quite a bit of consternation over the ebay strength but Merrill Lynch's explanation is that the reduced guidance has already been factored in. We'll have to see how eBay develops over the course of the day but it is another illustration of the renewed interest in technology stocks.
