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Listen to the Market
Dear American Capitalist Reader,
Years ago I worked for a man who taught me most of what I know about the markets. None of it was black-box technical stuff; most of what I learned was very Buffett-like in style: be patient, watch the cash flow, etc. And among his top “rules of the road” was a guiding principle that is at once simple, effective and, frankly, hardest to accomplish consistently.
He used to say, “Steve, listen to the market...”
At the time, I really didn’t know what he meant. Now, it makes a lot of sense. If you step back and look at stocks in terms of their action relative to the rest of the market, you will see stocks that, for whatever reason, are the darlings of Wall Street. The market is “talking” to you, telling you where the smart money is heading (and leaving). See a stock or sector that rises when the rest of the market tanks? Then that is the place to be.
I’ll give you a good example. We had a good, old-fashioned correction on Monday, a rebound on Wednesday, and pretty tepid action otherwise. But did you see the oil and oil-service stocks? In most cases, they resisted the correction on Monday, and rose Tuesday, the day the market was flat, by significant amounts. Many of them ended Tuesday higher than they had closed the day after Thanksgiving, a feat of astounding relative strength. Then, during the rebound rally on Wednesday, the oil stocks went through the roof to a much greater extent than the overall market -- again, strong relative strength. As of today, the oil and oil-service stocks are significantly ahead of the game, in spite of the worst downdraft on Wall Street in months. In fact, several of them are closing in on 52-week highs.
This kind of action tells you a lot of things, but when a stock or sector does not correct when the rest of the market tanks, it means everyone who was going to sell has done so. It’s washed out, and even the slightest hint of good news will drive the group higher. In regards to the oil sector, the market just told us that the retrenchment underway in this sector is over. Finis. Vorbei.
Moreover, superior relative strength is a major signal that suggests energy stocks are getting ready to rally sharply A partial list of the stocks that fit this bill are Exxon Mobil, Transocean, Schlumberger, Oceaneering, Core Labs, Atwood, Chevron and Imperial Oil.
My mentor all those years ago used to go through the Wall Street Journal a day after a major drop in the market and circle with a red pen (poor choice of color, I always thought) those companies that were either flat or went up. Then he would check back in a week, and if they were higher than they were the day before the drop, we bought them. It was that simple, and it usually worked. It pays to “listen to the market.” The trading action since Monday says one thing loud and clear: Stay long oil and oil service stocks.
Sincerely,
Steven Lord
Editor, Trend Investor
