LESSON 5

After a monster move in a stock market sector, we all look back and kick ourselves and wonder why we didn't see that train coming. Let's look at some examples:

A) During the housing boom/bubble - many of the home building stocks went up 500% or more.
B) Similar gains have been made in the past three years in Chinese stocks and in just the past two months there have been stocks in this sector that have gained up to 100%.
C) In the past few months, many steel stocks have seen moves of 100 to 200%. (For example, Oregon's Schnitzer Steel has gone from the low 30's to the high 90's since January 2007.
D) And in just the past few weeks and months, many of the solar energy stocks have moved up 50 to 200% and more. (Example: Canadian Solar is up from 10 to 44 since last fall.)

But there is one big problem in finding these kinds of life-changing stock buys.

I don't seem to get the word from brokers, advisors, TV pundits, and stock publications on these kinds of moves until they are largely over.

So let's see if I can help you to nail down one of these big market sector moves.

******************

When the price of oil & jet fuel goes up -- airline stocks will accordingly suffer. And right now this group is in the dumpster.

Recent High Current Price

American Air (AMR) 17 9
Delta Air (DAL) 18 7
US Air (LCC) 31 7
United Air (UAL) 41 13
Continental Air (CAL) 37 18
Jet Blue (JBLU) 12 5

There are few things in financial markets that yield more than the rate of inflation, plus a point or two, that are a one way street. At some point the price of oil will fall. (There will be a speculative bubble that will take the price too high and too fast. A recession will dampen demand. Alternative energy development and conservation will affect demand.) Some would agrue this point with me, but from the tulip speculation of the 1600's to the internet bubble of Clinton years, there is a pattern. The dips in oil may be short lived but there will be dips.

Oil prices may well advance to much highier levels (I'll leave others to speculate on this.) But at some point, the price of a
barrel will go too high and we will have a correction. And when this happens, I want to be ready to pounce.

Based on history, when oil prices come down, airline stocks will respond in the opposite direction. I'm not suggesting a long term hold on airline stocks -- these are companies that will be struggling for profitability into the forseeable future.
But if oil drops from $125 to, let's say, $75 to $90 a barrel -- we will see a trading opportunity in airline stocks that could move the stocks from 50% to 200%.

WHEN WILL IT HAPPEN? I have no idea -- but I am watching carefully and I'm ready to pounce. (If I had to guess, I might go with next fall - after the summer driving season. But it counld very well be a year or two down the road.)

WHEN TO BUY? My strategy will be to buy two or three airline stocks on any $10 per barrel decline in the oil price.
I would not argue with anyone who picked a different trigger price. But develop your strategy and then execute it when the dip in oil prices comes. There may be multiple, smaller, false moves - but if/when a serious decline in oil comes, it may have the potential to change your financial life, and you don't want to miss it.

WHEN TO EXIT? Once again, I teach my students to always go into a trade with a strategy. In this case, because of the volatility of oil and airlines, I would pick an exit point that would limit my losses to 5 to 10%.

This is not investing for widows, orphans, and people who like to hold onto stocks where they are showing a loss!
If you venture into these waters, the profits could be serious -- but you certainly want to go in with a very well defined plan and the discipline to execute your plan.

(Note: On the date of this blog, the price of oil was $127.21 - a record high close.)