Bob, the criteria which you seek is not cut and dry. One must have a vision of what will become prerequisite in our lives, understand macroeconomic trends, and sense the balance of the fear and greed that determines how the market will react. Institutions consider the overall health of the market and all other investment vehicles and then sectors that are offer the best risk/reward prior.
Take the telecom sector as an example. I shall ramble as I describe the events to provide a sense of the factors at play. Last summer I posted that the telecom sector was where the focus would be, given that voice/data technologies would be merging and the subsequent infrastructure buildup and enhancement that must occur worldwide. And the greatest growth would be outside the US, which defies quantification since it is yet unknown. Forward PE's cannot be estimated and trailing PE's are not even academic. On fundamental and technical bases, solid stocks in this sector like LU, NOKA, NT, and TLAB ran up. Then the Asian flu came and they got slammed back down for a few months. But the fear of the Asian flu got old, and the key was that fundmentals had not changed, it was a question of when and not if. So ... as each 4Q earnings report came out with good earnings and solid forwarded guidance, the same stocks ran up and proceeded to make new highs carried by the liquidity rushing in. If one missed the bandwagon on LU and NOKA, there was still NT. If one missed NT, there was still TLAB. The initial rebound in LU and NOKA would have been difficult to anticipate, but once they reported and the blocks bought in ... it was not difficult to follow the big boys and their thinking about the sector. They leave big tracks. I try to anticipate the transition points, and missing optimal entry/exit does not matter so long as that "part of the big picture" that I am focusing on is clear. The phrase in quotes is what provides the context for position trades.
As for the intermediate market correction, both technical and fundamental evidence support its likelihood. Using the telecom sector as an example again, the stocks are trading on perceived '99 earnings and technically they are overextended. Is is likely that the economic situation will not meet any gliches in '98?
Sector rotation will provide the market some stability, and DOW 8500 plus or minus 500 points is not a big deal. It's a big deal only if one is in the wrong sectors or stocks ... and cannot ride things out. |
