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CSI: Wall StreetBy Jeff ClarkThursday, June 7, 2007 You've seen them on television – those crime scene investigators who can catch bad guys by simply studying a piece of bubble gum stuck to the bottom of a Chinese take-out box.
I had lunch with a real-life version of a CSI yesterday afternoon.
Steve is a homicide detective in San Francisco. He's been catching criminals for more than 20 years, and – as you might imagine – he has a ton of stories.
"It's all about noticing inconsistencies," he said. "You know, the little stuff that no one else sees." Steve went on to tell me about a recent case where he noticed a small line in the dust on a bookshelf. The line was about the same width as one of the picture frames on the shelf, and he figured the picture had been moved recently. So he dusted the frame for fingerprints. And that led him to the murderer.
Tiny evidence led him to a big break in a criminal case. And, in that respect, Steve is a lot like a successful Wall Street trader.
In trading, just as in solving crimes, it's all about noticing the inconsistencies. Noticing stocks that behave well in the face of bad news can lead to profitable opportunities. Watching how shares of Merrill Lynch perform can provide clues as to the immediate direction of the broad stock market.
And looking for stocks that go up in the midst of a strong stock market selloff may give us a big break for next week.
Let me explain...
Stocks that perform well during market corrections often lead the market during the next rally phase. And stocks that suffer through a long period of decline and then turn higher during a broad market selloff experience the largest gains.
During yesterday's 129 point drubbing of the Dow, there were 2,675 stocks that lost ground on the New York Stock Exchange; 625 stocks went up.
If you get rid of all the exchange traded funds, all the income-oriented stocks, and all the "news related" rally stocks, then you trim yesterday's list of gainers down to about 250 issues. If you narrow the list further to include only those stocks that are less than 20% above their 52-week lows, then you're down to about 60 names.
And if you search that list for stocks that rallied during Tuesday's decline as well, then you have just 17 possible suspects – 17 stocks that could be the best performers during the next rally phase of the stock market.
Will I be sharing any of these ideas with you?
Before I answer that question, let me whip off my sunglasses, tilt my head a bit, squint my eyes and look halfway down at the ground – and in my best David Caruso impression, reply:
"I guess we'll know soon enough. Won't we?"
Cue theme music.
Best regards and good trading,
Jeff Clark
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