Back on Sept. 9, I wrote to you about how it was time to become "a man of steel"
. . . meaning that it was time to invest in steel stocks.
Well, since that time, ArcelorMittal (MT) is up 23 percent. (We made more than 27 percent on it within our Ultimate Wealth Report portfolio).
U.S. Steel (X) is up a whopping 50 percent during that same time. Even one of the more popular steel exchange-traded funds (ETFs), Market Vectors Steel (SLX), is up 11 percent during the last four months. Not bad for such a short period of time.
Ok, why in the world would something rally so hard? A lot of it has to do with investor sentiment.
You see, investors will take something that is true and hold onto that frame of mind for far too long. Yes, it was true that China had gotten an oversupply of iron ore and steel at one point. Yes, steel prices plummeted as a result of that and as a result of the global economy slowing down.
But there comes a point when investors will still hold that opinion very strongly, yet it begins to finally become an inaccurate view. So I'm always looking for signs that things are changing. I think that's one thing that has made me a successful investor — I'm constantly reassessing things and never locked into some unchanging view.
If you wait for all the analysts to agree and for all of the news press to turn positive on the financial news about a sector, you're going to be getting in way too late.
The best prices are still when the news is bad, YET things are starting to turn up and everyone hasn't realized it yet.
Well, I'm a research hound. I have my nose in my laptop many hours each day researching the global economy, commodities, stocks, etc. As I collect a broad enough array of data, it allows me to form an intelligent opinion about a sector or a stock, rather than just flip on the TV and have it spooned out to me what I should think about it.
I dug deep into the G-20 notes and found out there were going to be expanding infrastructure projects. I saw where ports in Australia were shipping record amounts of iron ore to China. I'm not sure why no one was picking up on it, but I was certainly going to let my readers know about it.
Additionally, large institutions aren't going to tip their hand to you first. They're going to load up on something and then later go on financial TV and tell you what they did. Then the masses hear this and go and buy too, which pushes up their positions.
Therefore, you have to "watch" what is happening rather than waiting to "hear" what's happening. How can you do that? In addition to doing your own independent research, you can look at the charts.
You see, I saw that the news for MT, X and SLX was just as bad as it ever was. Yet these stocks and the ETF were beginning to rise once again. Well, when the bad news no longer holds a stock down, it's because the "big boys" have changed their views and they are quietly accumulating the stocks.
Stocks only rise because there is "net buying" going on. That means the amount of buyers exceeds that of the sellers.
In addition to this, for the savvier investor who also watches Elliott Wave, you can tell when you are reaching the latter stages of a decline.
Elliotticians call these A-B-C corrections. In other words, there are three phases to the downward decline. A dive downward, followed by a bounce up and then the hardest and longest part of the dive.
After the bounce higher (wave B), there are generally five waves of overall decline before wave C comes to an end.
So I watch for divergences on the weekly charts of the relative strength index (RSI) or moving average convergence divergence (MACD). This is where the indicators begin to make higher lows while the stocks' price make lower lows. It shows that the downward momentum is slowing down, which further tells you that a trend change may be about to happen.
Picture it like you slowing down in your car before you make a huge change directionally in your car. You're not going to take a hard right turn at the speed limit. No, you'll slow down quite a bit and then make your turn. Markets do the same thing and these indicators on long-term charts like that help to tell you when they may be happening.
Then there are trend line breaks to watch for. You can also draw a trend line above the major highs of the overall decline. When a stock's price breaks it to the upside, that's a sign that the amount of buying is picking up and that the trend change could be underway.
For the person who can do these things (or follow someone who does, like what I do in the Ultimate Wealth Report) and buy and then have some patience while the stock appreciation comes . . . they can make a fortune over time.
But you've got to be able to separate how investors "feel" about the stock (which is the prevailing sentiment at the time) with what is actually a good time to be accumulating the company's shares.
By doing your own independent research or by following someone who does (like me), you can get a much more educated view of what's really going on.
By learning to watch the long-term charts, you'll be able to further separate the wheat from the chaff. You'll know when the news is bad and the stock will continue to be hurt by it and when the news is bad yet the stock is acting like the bad news doesn't exist.
When the news is bad and the stock begins to buck the prevailing sentiment, you need to sit up and pay attention. That's when there is quite a bit of money to be made over time . . . and sometimes even over a little amount of time, like MT and X rising 23 and 50 percent within four months!
About the Author: Sean Hyman
Sean Hyman is a member of the Moneynews Financial Brain Trust. Click Here to read more of his articles. He is also the editor of Ultimate Wealth Report. Discover more by Clicking Here Now.
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