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VIDEOThinking Broadly for Trading Opportunities
One way to think outside the box? Look for events that catch major headlines, then work backward to the industries and companies that may be affected.
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The merits of such a trading style should be self-evident. When Walmart (WMT) posts amazing earnings, there likely will be a price reaction from Target (TGT), Dollar General (DG), or Big Lots (BIG). Of course, the crux will be figuring out which way this price movement goes. If Walmart has a blow-out quarter, does this mean that it's taking traffic from Target, and perhaps even more upscale retailers such as Macy’s (M), and Dillard's (DDS)? I'm not going to discuss those links in this article, but leave them for the trader to explore in their favorite sectors. Suffice it to say, there are plenty of opportunities to be had in this style of tactical trading.
While I won’t be focusing specifically on the above example, I do want to take a look at two other situations that can provide big opportunities to the savvy trader. Using these as a springboard, traders can then hone in on other areas that look promising.
Current Events
In April 2009, Vice President Joe Biden publicly remarked that he would advise his family to not go into confined spaces with other people because of the recent pandemic of swine flu. NYC Mayor Bloomberg rebuked the VP, saying he was scaring people from the subways. The White House ended up apologizing for VP Biden’s remarks. But the damage was done, and was merely symptomatic of a much larger public fear of the unknown. By the time these statements had been made, swine flu had already been on the airwaves for weeks upon weeks, and astute traders had already been culling for opportunities to capitalize on the event. (I'm not here to debate the merits of making money on the health scares of Americans. If traders went down that road then there are thousands of companies they wouldn't allow themselves to trade.)
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While I'm primarily a technician at heart, I'm also cognizant enough of current events to know when a major event will have economic impact on our markets. Our job is to take money out of the marketplace, and I'm always looking for a broad array of opportunities to that end. When something like the swine flu hits the nightly news and every school in the nation, and is on the tip of the tongue of every person standing in line at grocery stores, traders need to start looking for an angle to play it.
Sector Sympathy
A second situation where traders can profit is by finding sectors that play off of the news of another. Over the last few years, there's been a consistent link between oil prices and solar stocks. Some newer traders may scratch their heads at this seemingly disparate connection. But when the entire picture is digested, the connection becomes a bit more real.
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As oil prices rise, vehicles and heavy machinery become much more cost-prohibitive to operate. The higher oil prices go, the more people start to clamor for alternative energy sources. Solar is seen as a potential candidate to assume the energy throne. Take note of how oil prices (via the ETF USO) have trended in three distinct directions during the 2007-2009 period. These trends were so long-lasting that it would have been easy for the majority of traders to at least pull a chunk out of the middle of the trend. But other traders might have went a step further and started looking through solar names for the sympathy play.
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First Solar (FSLR) is perhaps the granddaddy of the solars, and as such was the one many traders were playing on the back of higher oil prices. Whether the solar bug hits full steam or not is irrelevant to the life of the trader. The perception that solar is the wave of the future as oil becomes further demonizes is the sentiment traders are attempting to capture. Notice the uncanny similarity in the charts of First Solar and USO over the last three years, and I believe it's impossible to come to any other conclusion than solar is indeed a fantastic sector play on the back of oil prices.
There are many other interconnected plays for traders to explore. The main idea is to keep your eyes and ears open to the many opportunities that are presented daily. Look for events that catch major headlines and then work backward to the industries and companies that may be affected. Focus on up-and-coming technology, and then research what companies may become obsolete from the game changer. Thinking out of the box for fresh ideas will be your greatest ally when exploring trading opportunities from this angle.
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