Following the Early Birds in Stock Market Sector Reversals
Spotting trends early can reap returns for observant investors.
— -- Too many investors are focused on what may happen down the road instead of what is happening. Sure, the stock market is all about the future, but the future is now – what’s just starting to happen.
Some of the greatest investors in history have embraced the concept of value investing — buying depressed stock in industries that appear to be going nowhere and then reaping profits when they rise. These investors are called contrarians because they hold views contrary to those of the market.
Some economists say value investing can’t work because, in what they call an efficient market, all known information is already priced into stocks. Others believe that value investing can work because the time it takes for information to become known creates windows of inefficiency that investors may exploit to reap profits.
The key is to making it work is to be on the cusp, not late for the party. If you invest in a stock that you hear about from a friend or through the grapevine, you’re probably too late to get in on substantial gains because it’s already priced up. Instead, follow the money — the smart, early money that’s beginning to flow into stocks or sectors that much of the market still shuns. You can’t invest this way based on the headlines because not only are the headlines behind, but they also reflect what everyone knows or thinks they know.
A current example is the oil industry. The mass media’s drubbing of oil as a depressed industry is common knowledge. What the mass media isn’t telling people is that, since October, more money has been trickling into oil stocks. In mid-October, 16 to 20 percent of oil industry stocks were in an uptrend. By mid-November, this range had risen to 22 to 26 percent for some oil companies and 28 to 32 percent for others. If this were a gushing flow, the headlines would have it. But, as a trickle, it’s below the mass media radar.
Another current example is media stocks. In mid-October, 22 to 26 percent of stocks in this sector were experiencing an uptrend. By mid-November, this range had risen to 34 to 36 percent. This rise is hardly gangbusters, but it’s significant in a sector that many are down on, in part because of the financial struggles of the print media industry.
A more pronounced change for the same period was in building (construction) stocks, which started at 28 to 32 and rose to a range of 44 to 46. The general market perception of the building industry is anything but rosy, chiefly because people think of it in terms of its fall several years ago from sky-high performance amid the housing bubble.
Though potentially significant to the careful observer, the increases in investment in these sectors aren’t pronounced enough to trigger widespread attention. The key is to find them before they become obvious and boost values to a high plateau, with no room for gains.
This hunt for money inflows, while business as usual for many professional investors who subscribe to expensive data services, is much tougher for individual investors. But perceiving nascent upswings isn’t beyond the capability of the resourceful.
Any opinions expressed are solely those of the author and not of ABC News.
Dave Sheaff Gilreath is a founding principal of Sheaff Brock Investment Advisors LLC. He has more than 30 years of experience in the financial services industry, beginning with Bache Halsey Stuart Shields and later Morgan Stanley/Dean Witter. At Sheaff Brock, he shares responsibility for setting investment policy, asset allocation and security selection for the company's managed accounts. He also consults with the clients on portfolio construction. Gilreath received his Certified Financial Planner® (CFP) designation in 1984. He attended Miami University in Oxford, Ohio, where he earned a B.S. degree.
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