Trade Like an O'Neil Disciple: How We Made 18,000% in the Stock Market

2.5. 1999—THE BUBBLE EXPANDS

Part of successful investing is knowing when a fundamental part of the market changes, even though the market may have never behaved this way in the past. In the late 1990s, it was the earnings metric. Some Internet stocks that made huge gains had little to no earnings. While earnings are one of the most important variables I use to gauge the potential of a stock, I realized that sales growth was a useful metric for stocks with no earnings. Understanding the fundamental story behind the stock together with understanding how Wall Street perceived the story behind the stock proved beneficial because it is the institutional money from mutual, hedge, and pension funds that cause a stock to make huge advances. Because of this fundamental change in the market, I learned that markets sometimes change in subtle and not-so-subtle ways. While certain key fundamental and technical variables continue to work cycle after cycle and form the core of my strategy, other variables have a limited life. It is up to investors to follow the markets closely so they can see when new variables can be used to enhance profits as well as when such variables lose their predictive value. Be wary of black box methodologies that claim to be profitable without having to be fine-tuned. They may work for one or two market cycles but must be fine-tuned to keep up with changes in the markets.

In the first quarter of 1999, most of the stocks that triggered buy alerts were technology stocks ...