Every once in a while, a sector suddenly starts to attract attention resulting in sharp rise for stocks belonging to that sector regardless of their fundamentals. The phenomenal rise one sees in many such stocks attracts all kinds of investors – from the novice who wants to bet on the hot stock of the day to the professional who sees a opportunity to make a quick buck (either by participating in the rally at a pretty early stage or better still, shorting the stuff once it seems clear that the trend has all but ended).
Way back in mid 2010, with the markets having strongly bounced back from its lows, one sector seemed to take off vertically. On Television as well on the Chat Boards, these stocks were being talked about incessantly. But then again, when a stock goes from 100 to 500 in a matter of months, it does attract all kinds of attention.
Of course, its not that sheep enter the arena with the objective of getting slaughtered. They believe they are more intelligent than fellow sheep and hence can get out of the ring before the stampede starts. Unfortunately that rarely happens as no one wants to get out of a happening sector and by the time they decide to exit, its always too late.
This is more clearly pictured in the chart below – a chart that has been there for long
The story behind the chart is as interesting as the chart itself and you can read all about that out here
So, what has the South Sea Bubble have anything to do with the Packaging sector. Well, for a start, the charts looks pretty similar. Do take a look at the charts of the major companies below;
As you can see from the above charts, the stocks all rose and fell at the same time and since this was unlike the 2000 Information Technology bubble where many a investor not only lost his shirt but also his shorts, this rally and fall would have just transferred money from weak hands to strong hands without anyone being the wiser.
Of course, this kind of boom and bust in sectors is nowadays normal, just that it doesn’t make big noise and hence falls through the gap between the Signal and the Noise.
Sector stocks generally move in unison (some leading and some lagging, but trend being bullish all the same). But unless its a rally that is sustainable for the long term wherein a better understanding of fundamentals including whether the factors that are leading the rally are better understood, one easily falls prey to short term moves that end up as long term holdings in the portfolio.