The Bank of England and European Central Bank both announced no changes in their interest rate policies, and there was a mild improvement in U.S. jobless claims. But these sorts of events, that were able to act as catalysts during periods in which investors were more nervous, have increasingly little impact.
Investors are starting to take their eyes away from the big picture, which has been rounding into shape, and focusing more and more on individual companies and their prospects.
This is how the transition from bearish cycles to bullish cycles tends to transpire. In more bearish periods, macroeconomic issues tend to move all stocks at once and there are high levels of correlation between sectors and stocks. In more bullish periods, investors take their eyes off macroeconomic issues — since they are generally positive — and therefore returns between sectors and stocks decrease.
Periods like this tend to be more rewarding for longer stretches of time because, as a trader, you do not have to constantly look over your shoulder for some exogenous event like an election in Italy or a single bad export data point in China. Your research into individual companies, sectors and themes begins to pay off more.
Individual companies are being rewarded for their strengths in managing their products and services rather than being at the whim of the global economy. And as traders, we can reap those rewards too.
Recently in my Trader’s Advantage service we had a trade in Workday (NASDAQ:WDAY), which was cool on two levels. First, the idea of buying a breakout from the IPO range worked well, and we were able to peel off two half-sized wins, at 6% and 12%. And then we were able to spotlight a level that should have acted as an exhaustion point for that move, and, sure enough, the stock fell back 4% in regular session trading — and another 2.5% after hours — when a solid earnings report fell just a bit under expectations. In short, the stock acted just right as an individual issue reacting to its own place in the universe, rather than being blown about by macroeconomic forces.
Going forward, I see some very interesting new trades shaping up in regional banks and aerospace. Both have been pretty beat up. In fact, the regional banks are only just emerging from their 2009 levels, as you can see from the charts of Fifth Third Bank (NASDAQ:FITB) and Huntington Bancshares (NASDAQ:HBAN).
If they can really rally in the same way that homebuilders and large banks have, we may well have three to five years of appreciation ahead — almost as if the bull cycle clock for this group were reset at the March 9, 2009, levels that industrials, techs and health care stocks enjoyed.
InvestorPlace advisor Jon Markman operates the investment firm Markman Capital Insight. He also writes a daily swing trading newsletter, Trader’s Advantage which aims to capture profits of 15% to 40% and often as much at 100% to 200% in less than 90 days.
Professional traders and hedge funds make huge profits off volatility. Now, Jon’s service CounterPoint Options levels the playing field with the first service geared towards helping individual traders make steady, consistent profits with the VIX. Get more information on Trader’s Advantage and CounterPoint Options today.