Stocks

While markets can have cycles certain markets are better defined as “cyclical”. One example of a cyclical market is the “energy and production” or “E & P” market.

At the moment the price for a barrel of oil is down, significantly, from not too distant highs.

Is this movement unpredictable? No.

The question is “do you sell a cyclical stock “at the bottom”? Fool or wise?

If you sell a cyclical at or near the bottom of its stock market price slide, who is your buyer “at the bottom”? Fool or wise?

If it is wise to look for a stock buying opportunity when a market vertical takes a dive, as oil and gas stocks have recently, is it equally wise to sit tight on energy holdings when energy stocks take a wild swing down?

Traders like to trade.Volatility is their stock in trade.

E & P investors may be a bit less interested in short term swings.Therefore trading volumes may not materially increase. What you see, when you see some trading volume increases, is simply the same shares being shuffled back and forth by the swath of “red and green light” traders.

A number of oil and gas stocks have relatively small trading floats, so it’s not unlikely that, as fast as some E & P stocks have slid down, they may equally swing back up into its normal trading range (if not trajectory).

Do your homework with E & P stocks. There are sound reasons why many energy stocks are held, in large percentages, by many funds. It is unlikely that the demand for energy will be going down any time soon. There may be moments of over supply but surely as energy prices drop – as will often correspond with energy stock prices – those lower energy prices will often be met with less constrained consumption. Something like this: jet fuel prices drop -> airfare prices drop -> travel increases -> consumption of fuel increases demand -> increased demand results in higher prices.

Energy stocks may be cyclical but with a growing global population those cycles will tend to follow an upward trajectory.

That is why so many funds hold energy sector stocks. That is why many funds may see the current dip as a buying opportunity instead of the moment to sell.

YMMV.

This “stock tip” requires a bit of homework. I know you want fast easy money. Patience. This is close to that.

Do a bit of research about companies in a vertical.

Identify companies in that vertical that share similar metrics. Look at summaries of corporate data: cash on hand, cash flows, debt, etc. In other words, dig into their financials.

Identify 5-8 companies that have similar profiles.

Track their stock movements. Track their news.

On periodic “general bad news” market swings keep an eye on those 5-8 companies.

Do 1 or 2 move outside the range of the others? Without any discernable factual basis? Without “news”?

Do the 5-8 companies tend to equalize their swings, as if in a dance?

Here’s “the tip” or at least food for thought: Some market movements are emotional. Some are “follow the leader” or trade on the green or red arrow. Some are just dips based upon a single shareholder making a move on a slow day.

What I am describing it an “all other things equal” scenario – where 1 or 2 stock prices get out of line, say by dropping 2.5% when all others drop 1.2% – MAY be an indicator of an opportunity to move in ahead of a rebalancing.

This is just food for thought and experimentation. It’s not irrational nor entirely speculative.

The risk is that there MAY be circumstances, not yet publicly available, explaining why a stock is “moving out of line”. There are laws prohibit trading on non-public information but one may assume that “it happens”. Of course, a big move by a single player ahead of the news could prove problematic, so look for indications of single versus multiple investor moves when deciding to experiment with this strategy.