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Eventually, because there is no support, individual investors start to get scared. They start selling their shares on a daily basis. That’s what happened to Starbucks. It just kept dropping and dropping. It looks like it’s found a little bit of support here, around the 16 level. Once again, at this level, which we haven’t seen since 2004 – there may be some institutional support coming back into the stock, looking to purchase it at a significantly lower price level than it was up here. Maybe they will take for another run back up to 40, or even higher. Who knows?
At one time, if we go back to 2003 – the reason that mutual funds actually got into the stock at the beginning, was because of the fact that they could see the trend ahead. The bear market was in 2000. In 2003, the bear market was pretty much over on the NASDAQ. Things started turning around. There was investment. Business started investing.
The economy was looking much better. They knew that the consumer was the one who was going to benefit from this turnaround in the economy. There was going to be a tremendous amount of wealth created for consumers, over the next few years. They got into stocks like Starbucks, and ran up the price.
As Starbucks prospered, so did the mutual funds who brought their stocks. At some point, they realized that, “Hey, the party is over. The consumer is no longer in as good shape as it was back in 2003.” In 2007, we had the housing crisis to deal with. Interest rates had started to go up just a little bit, at this point. The consumer wasn’t looking as good as he was back in 2003.
Eventually, the mutual funds knew that they had to start looking for other stocks that would take the place of the consumer stocks that they had purchased. They started looking around. You can see, right around 2007, right when Starbucks started selling off – that was about the time that mutual funds started getting involved in stocks that had to do with oil and gas.
There is a cycle going on here. That’s my point. My point is that the stock market goes up and down based on the cyclical nature of sectors. During certain types of economies, certain sectors are going to do better than others. From 2003-2006, it was the consumer that was the winner during that period. Interest rates were low, they were buying houses, they were buying big SUVs, gas prices were low. This was the time of the consumer.
Now, we’re changing again. In mid-2006 to 2007, mutual funds realized, looking ahead, that in fact, gas prices are at a historical low. They realized that gas is going to become a significant factor in the economy. They probably received research reports stating that there was going to be a gas crisis in a couple of years, if the government doesn’t do something.
They started to put their money on the table, and started buying up all these oil and gas stocks, going back here in mid-2006 and 2007. As soon as they decide that the sector of oil and gas are going to be the next hot stock, everybody jumps into it. The prices will just run through the roof.
As soon as they see institutional support here, prices will continue to go up. Those mutual funds are buying and selling. That’s another thing, too. On the way up, not only do mutual funds buy, but they also sell, occasionally. If they continue to buy, the prices are just going to run up too high on them. Occasionally, on the way up, the mutual funds also have to sell, once in a while.
On average, they are going to buy more than they sell. For example, during this run here, maybe they bought a couple of million shares, but they unloaded a couple of hundred thousand here. They buy another million shares, but they start unloading a few hundred thousand shares here. They provide support by buying more here, selling here, buying more here, and so on.
At this point, people start to realize, “Hey, this RIG, this Transocean, is starting to go up in price, after all. It broke through a significant price level here, at 90.” Now is the time to jump on. People jump on. The mutual funds sell. They support it by buying, and it runs up into an exuberant run here.
That is the cycle of stocks. The reason that I believe that the market is starting to take a turn downward, is because of the cyclical nature of the way mutual funds purchase stocks and sell stocks. They are getting out of their oil stocks. They realize that oil has had a tremendous run. They are starting to unload their oil stocks.
All of a sudden, in the news, you see how closely correlated newscasters are associating drops in the market, with increases in oil prices. For a while, when the oil prices went up, the stock market would go down. There was this fear that oil prices would go significantly higher, affecting the economy, so prices of the stock market were going down.
Lately, over the last few days, that correlation has disappeared. Newscasters will say just about anything, if they think there is a correlation. On these days here, they use the excuse that prices of the stock market dropped, because oil prices were going up.
On these days here, lately, oil prices have actually dropped in price. The stock market continued to go down. The reason for that was because the large mutual funds could care less about the price of a barrel of oil. They know the party is over, and they are unloading their oil stocks right now.
There is a sector transition going on. Mutual funds and large professional investors are getting out of their oil stocks. What you want to take a look at is, what is the next sector to be hot? What is the next sector that mutual funds and other professional investors are going to start putting their vast resources of money into?
That is something that you can do some research on. You can keep an eye out for what people are talking about. I’ve heard a couple of things. If you listen to the news very carefully, you have to filter out the baloney from what is real. They say that technology is starting to come around again, and tech stocks are starting to come around again.
If you take a look at the QQQs, which is the Power Shares ETF for the NASDAQ 100, you can see that during this recent rally, the prices have run up pretty well. They have really done well, and held their own in this most recent sell-off. They have stayed within their channel, and not only that, but they stayed above their 200-day moving average here, which is significant.
Technology stocks is a possible sector that could become very strong here. Maybe that’s where mutual funds are putting money. All we are doing is looking for clues as to which sector now is going to become the hot one.
Some other people have said that financial stocks, like banks, maybe Goldman Sachs, Lehman Brothers, and some others… XLF. I have it on my watch list right here