Watching the Wildfires of Momentum Stocks

Since being evacuated numerous times from both of my homes in the mountains of Northern California over the last few weeks, I have learned quite a lot about wildfire behavior and discovered that some of the action we have been seeing in hot stock sectors is surprisingly similar.

Sector movements in stocks tend to run in cycles. Sparked by news, we will see sectors suddenly ignite, and the upward momentum gains power until eventually dying off when the market loses interest and the next hot sector takes over.

We saw this in metal stocks, such as Nucor (NUE - commentary - Cramer's Take) and Arcelor Mittal (MT - commentary - Cramer's Take). We saw this in solar stocks, such as First Solar (FSLR - commentary - Cramer's Take), Canadian Solar (CSIQ - commentary - Cramer's Take) and JA Solar Holdings (JASO - commentary - Cramer's Take). And we also saw it in agriculture stocks like Monsanto (MON - commentary - Cramer's Take) and Potash (POT - commentary - Cramer's Take).

One important factor affecting the behavior of a wildfire is the topography of the land. Fires travel very quickly uphill, and the steeper the slope, the faster it burns. The reasons for this are that wind is usually flowing uphill, and the fire is preheating fuel up the mountain when the smoke and heat rise in that direction. Once the fire reaches the top of a hill, it slows down and struggles.

This is the same thing that happens with hot sectors. When they are hot, and there is news adding fuel to the fire, they are travelling uphill very quickly. During that time, they become my "focus" stocks.

Fire Watch

If I am daytrading, I will be trading those focus stocks every day aggressively, buying every dip and riding the uptrend. When they gap up, opening above the previous day's closing price, I expect to see very minimal selling at open if the strength is continuing. So I will look to buy the first dip, and from there it should continue the uptrend, up above the open price, above the premarket high, and eventually above the previous day's high. Quite often they simply trend right up along the 50-day moving average. Any sign of weakness, and I will jump out again.

---

At the time of publication, Wolff had no positions in stocks mentioned, although positions may change at any time.

Ken Wolff is founder of MTrader.com, the first educational daytrading site on the Net, and co-founder of InvestingOnMomentum.com, a Web site devoted to short-term potential for retirement accounts. TheStreet.com has no affiliation with InvestingOnMomentum.com, and no endorsement of InvestingOnMomentum.com or momentum trading is intended. While Wolff cannot provide investment advice or recommendations here, he appreciates your feedback; click here to send him an email.