There is an opportunity lurking in the stock market right now. No one is talking about it. You see there is a sector that has been falling for years that hit a major bottom several months ago. It’s been basing and getting ready to turn up and start a new bull market. But no one thinks the stocks that make it up are a buy.

In fact odds are the analysts who do cover the sector are negative on it too. The news on it has been bad. Earnings probably have been in decline for years. The stocks are money losers. But they’ve bottomed. Insiders are buying because they know the news won’t get any worse. A year from now the stocks in the sector will be four times the price they are now and investors who take the opportunity to buy in now will be rich.

But almost no one will buy in now. You see Wall Street won’t tell you about this opportunity. And chances are your broker won’t either. Very few people will buy in early. Chances are that you don’t know anyone that is in it. Some may never have even heard of the companies that lead it. Don’t worry. One day they will.

You can’t learn how to spot opportunities like this in school. I started investing in 1997 when I was in graduate school getting a Masters Degree in history. Over the years I had taken a few courses in economics. Nothing I ever learned in school has applied to successful investing.

I had always been interested in economics and the stock market. I was going to college with the idea of eventually becoming a professor in history. I still read a lot of history and am in the process of writing a history book of my own. What had always interested me though was what happened behind the scenes – what were the real causes of historical events. Who were the real players behind the Presidents and politicians? How does power actually work and who really has it?
A book I am writing on the side tries to answer those questions when it comes to the state of Virginia and the South after the Civil War until the 1950’s. But the answers to those questions no matter the time or place usually involve economics. The boom and bust business cycle has a habit of not only changing who is at the top but has an influence over the entire culture. Capitalism has been called "creative destruction" for a reason.

But the point is - my interest in history and economics trickled into an interest in the financial markets themselves. It isn’t a big step to go from studying the Federal Reserve, the stock market crash of 1929, and the Great Depression to wondering how you can make money in the market yourself.

And at the time I was in school we were living through a wild period in the global markets. We saw market crises in Asia, Russia, and the near blow up of Long-Term Capital Management. Emergency Federal Reserve bailout programs to stop these crises were followed by the greatest stock market bubble in world history in the Nasdaq. One needed to learn how the financial markets work in order to understand what is going on today.

Inheriting $15,000 became a further reason to begin to learn how to invest. I decided that instead of giving that money over to a broker I wanted to learn how to invest it myself. Over the course of several months I read at least three-dozen books about the stock market and investing.

The books all had a myriad of investment strategies, from people claiming to be Warren Buffett value investors - to the Investor’s Business Daily CANSLIM growth investing - to charting - to Peter Lynch platitudes about buying stocks of companies where you shop. I also read some classic books on trading such as the Livermore book on stock speculation, Nicholas Darvas’s How I Made a Million in the Stock Market, and authors such as Wyckoff, Gann, and Edwards and Magee.
But out of all of these books there is one book that changed everything. And every year I read it once again. It is Stan Weinstein’s Secrets for Profiting in Bull and Bear Markets.

The book was written in 1988 and has a funny cover on it. Funny because the author has the type of hairstyle that people used to wear in the 80’s and makes the book look outdated. I can’t remember if I saw the book in a bookstore or if I bought it because it was mentioned in another book. I remember, however, that many of the people interviewed in Jack Schwager’s Market Wizards books talked about it.
I don’t know if you’d be sitting reading this now though if I hadn’t read this book. If you haven’t read it then you should definitely pick it up.

With the use of the techniques in the book I turned the $15,000 into over $200,000 in the space of a few years during one of the worst bear markets in history and went on to come in second place in the 2003 Robbins Trading Championship. I now run a hedge fund with several million dollars in it that posted a gain last year, which put it in the top 5 percentile of all hedge funds – and I think this year is going to be even more exciting.

When I read the introduction in the book I knew I was reading what was a revelation for me at the time. He used a simple phrase "The Tape Tells All" which immediately made sense to me and summed up what I was trying to discover.

Weinstein’s philosophy all came down to that simple slogan. What he meant is that all of a company’s earnings, management, outlook, the possibility of a buyout - all of the fundamentals – are currently known and factored into the stock price. And there is no way you can know all of this information. You can’t know when a company is about to be bought out or when some hot news item is going to come out. You can’t know when bad news is coming either. You aren’t an insider. You can’t predict the future.

But people try. They chase rumors. They act on tips on the hopes that the tipster has some inside dope. But almost all stocks bought on tips drop. Not many people have special knowledge about a company’s prospects that isn’t already out in the public domain. It’s impossible trade by trying to know the news ahead of time. Only the insiders can do that.

In my reading I came to see the stock market as a great competition. When you buy a stock someone else is selling. There are winners and there are losers and you need to have some sort of edge to be a winner. But how do you get that edge? There are insiders who have an edge that you never will have. How do you go up against them? How do you effectively challenge (what I thought was) the intelligence of the Wall Street mutual fund managers and analysts? How do you compete with professionals and hedge fund managers?

Most people simply buy because they read a magazine, hear some good news, or see some hype on CNBC. But the market discounts the future and the public consistently buys behind the curve. The insiders distribute ahead of bad times and buy when the news is bad and the future is bright. How can you outsmart those people? It seems like you need to know more than they do - know everything you can about the economy, their competition, and perhaps be able to predict the future.
But that is virtually impossible. Stock analysts merely pretend to do that. In reality, they are sales people whose job it is to get you to buy stocks their firm is pushing. And the mutual fund managers on TV – they simply give rosy forecasts about the economy and the stock market to hook you into buying into their fund. They are selling you too.

You never hear a mutual fund manager say sell, because if everyone sold out of their mutual funds they would be out of a job. That is why CNBC acts as an infomercial for Wall Street and why its viewers almost always get left holding the bag. Mutual fund managers - by a large percentage - don’t perform better than the averages. They have no special abilities.

No. The people with the special knowledge are the insiders. A recent study revealed that US Congressmen, on average, outperform the market by 10% year after year. It isn’t because they are value investors or were trained on Wall Street, but because they have a line to the inside dope. It’s a line we’ll never have.

What Weinstein revealed to me a philosophy that aligns your investment position with the smart money. But you don’t need too. Weinstein’s insight is that the action of a stock can tip you off. “You don’t have to be Sherlock Holmes to know that something ups up in stock XYZ if it has traded an average of 20,000 to 30,000 shares each week over the past several months while quietly moving back and forth in an 8 to 10 trading range, and then, suddenly, it breakouts out above its ceiling, or what we technicians call resistance on huge volume(say, 250,000 to 300,000 shares for the week),� he wrote.

What we need to do is be able to read a chart for signs of insider accumulation and then buy along with them. Now I can’t just look at any chart and say here are the insiders and here the insiders selling to the greater fools. But there are consistent patterns to stocks and insider buying influences some of those patterns.

The philosophy of technical analysis – charting – holds that a stock is influenced by the market forces of supply and demand. When demand increases and purchases eat up the supply of stock, then a stock rises in value. When sellers hit a stock they increase the number of shares available – increase the supply – and if there is no subsequent increase in demand then that stock will fall in value.

What is interesting is that when you plot a stock chart out you’ll notice that it has areas of 'support' and 'resistance'.
Support is an area where a stock seems to always bounce off of. Resistance is an area where rallies in the stock don't have the strength to continue higher. These are areas in which demand keeps a stock from falling (support) or sellers hit and prevent a stock from going up (resistance).

When a stock is in a trading range it is in a neutral zone in which an ongoing battle between buyers and sellers takes place. It isn’t so much that the two forces are fighting each other, but that they are roughly equal. The more equal they are the lower the volatility in the stock you are following will become.

For instance, if a stock trades between 8 and 10 for several months it has support at 8 and resistance 10. As long as the stock continues to trade in this range the buying and selling pressure will be roughly equal. That is the real reason why the stock remains stuck in its range.

However, eventually one force will simply run out of energy. Once that happens, the stock will either break resistance or break support and an explosion in volatility and price action will occur. This is what causes a spike in volume and a rapid jump in stock price after a breakout. It isn’t so much that a whole bunch of buyers come in that makes a stock go up, but simply that the sellers have run out of shares to sell. With the sellers gone, the buyers are able to take over and run the price up.

Now this doesn’t necessarily mean that insiders are buying and beating the sellers. This simple technical pattern can be short-term and just last a few hours or a few days. However, there is a time in which it comes after a period of insider buying, in which shares are exchanged from the weak hands to the strong. This is the buy point that is the most profitable because it happens at the start of a long-term bullish trend. You want to get in not when rumors are floating around and analysts are pressuring people to buy. No. You want to get in right at the start of a real long-lasting trend. That’s the secret to making the big money.

Part II Will be Posted Tomorrow Morning