Think Different

There is a saying that in the stock market, the obvious rarely happens and the unexpected constantly occurs and it is true. The market could be quite counter-intuitive sometimes. The biggest opportunities are often disguised and exist in industries most people are not willing to touch.

In 2012, the conventional wisdom was to stay away from all Chinese stocks. Their economy was slowing down. Their stock market was a mess. Their earnings numbers were questionable. As a result, only two Chinese ADRs made their debut on U.S. exchanges that year: Vipshop Holdings ($VIPS) and YY Inc. ($YY). Both of them formed solid technical bases, broke out to new all-time highs and never looked back.

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Don’t assume that you know everything. The market is frequently a lot wiser than you and discounts events and processes long before they become mainstream. It doesn’t hurt you what you don’t know, but what you think you know when it isn’t so. Don’t let your biases blind you. Pay attention to price action.

The best performing stocks in any given year are the ones that surprise the most, which means that they are very likely to come from industries no one expects. In late 2011, housing related stocks started to clear 52-week highs. No one believed, because of their horrid performance in the previous few years. They ended up being the hottest sector in 2012. In early 2013, solar stocks started breaking out to new 52-week highs. No one believed. In most people’s minds, they were garbage that should not be touched. Many of them tripled in a few short months.

Every trend needs skeptics and doubters. Otherwise there won’t be anyone left to buy. This is why I always smile when I see people making fun of my investment ideas. It tells me that I am on the right path.

It happens over and over again and it will continue to happen, because this is how the market works. Don’t believe me? Take the advice from much more prominent sources:

To make money, you must find something that nobody else knows, or do something that others won’t do because they have rigid mindsets – Peter Lynch

To make money in the stock market you either have to be ahead of the crowd or very sure they are going in the same direction for some time to come. – Gerald Loeb

You can only make big money by being right about something that most people think is wrong. – Paraphrasing Howard Marks

Solar, Wind and Nuclear Stocks Gone Wild

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When it comes to energy (and not only), I let the market (price action) does the thinking for me. It is not news for anyone that solar stocks ($TAN) have recently had a major comeback and are one of the best performing industries in 2013. They are not the only energy industry that has done well.

The Wind ETF $FAN is up 40% YTD and most of its gain occurred in the past three weeks.

Nuclear stocks have gone atomic this week with 100% moves in $USU and $URRE.

Despite expectations for a slowdown in the emerging markets economies, crude oil has cleared $100 and stayed there.

Coal and natural gas are the only dogs in the energy space.

I wonder what is the market trying to discount here. Typically, commodities start to outperform in the last stage of the recovery cycle, when inflation begins to rise. The latest inflation readings have been tepid, but market is usually forward-looking and discount 6 to 12 months into the future. It is not always correct, but we should always pay attention to what it is doing.