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Relative Strength of Stocks The Sleuth
Back on July 25, I wrote a column on the concept of "relative strength." I examined the nine American Stock Exchange Select Sector SPDRs to compare the performance of nine different market sectors and illustrate how one can use relative strength analysis to determine which areas of the market were the most appealing. My underlying thesis in focusing on a sector's relative strength was that strength begets strength. In other words, so long as the general market remains constant, the best performing sectors should continue to do better than others. Therefore, when you are considering what areas of the market to trade or invest in, you're better off buying the leading sectors rather than the laggards. ********************************* Up More than 200% -- Juice is On the Loose! This past Friday morning, Resource Trader Alert readers were instructed to sell half of their January 2007 orange juice calls for a 200% gain -- one of the many chances they've had in 2006 to more than double their money. Read on to learn how you can get in on the action... ********************************* This same concept of relative strength can also be applied to individual stocks within a particular sector or industry. When you have targeted a few areas of the market to invest or trade in, it's usually wise to focus your attention -- and your capital -- on the issues within the sectors that have performed the best. More often than not, so long as there is not a fundamental change to alter the underlying character of the market, those same leading stocks are likely to continue to outshine the shares of other companies in the same industry. That same concept of sticking with the strongest stocks also applies to stocks from different sectors within the same broad-based market average. Even when examining a diversified market index, you pick up some clues about where best to deploy some of your trading or investing capital. To illustrate the concept of relative strength applied to a broad-based market index, I put the Dow Jones Industrial Average under the microscope. In contrast to other closely scrutinized large-cap indexes such as the S&P 500 and Nasdaq Composite, the Dow Jones Industrial Average has been able to use the rally of the past few months to recoup all of its losses from the market meltdown that commenced in 2000. In fact, dropping as low as 10,698.85 on June 14, the venerable Dow 30 index has notched profits of 12% through the end of trading on Monday, My goal in applying the relative strength concept to the Dow Jones Industrials was to find out which of the 30 stocks that comprise this heavily monitored stock gauge performed the best in order to get a heads up on where the superior performances in the average are likely to come from in the next few weeks and months. I also figured that since the 30 stocks in the Dow Industrials cover a number of diverse market areas, examining the relative strength of these large-cap industry leaders could provide clues as to which sectors were likely to do well over the near-term. Now, a variety of fundamental and economic reasons have been suggested as the catalyst for the strength behind the major equities averages over the past few months -- plunging oil prices, lower long-term interest rates, decelerating economic numbers and declining commodity prices to name a few. I'm not dismissing the effect of any of these influences on the market's overall performance. But it's my belief the actual price changes in a stock or index often precedes knowledge of the underlying factors that caused those price changes. Let me issue a caveat here. There is no guarantee the stocks that have acted well will continue to outperform all the others. Markets are dynamic and change based upon differing macroeconomic, political, and fundamental factors. Still, barring a significant change in the market's character, odds favor the Dow stocks that captured the greatest portion of the Index's gains since the summer run-up and will continue to lead the way during the next move up -- if in fact there is one. With that in mind, I went back and calculated the respective performances all 30 Dow Jones Industrial components since the close of trading on July 14. The Dow Jones Industrial Average technically bottomed on June 14. However, with the benefit of 20/20 hindsight we can see the index formed a bullish double-bottom on July 14 when it successfully retested that June 13 low. ********************************* $2,000 into Half a Million This small-town Californian turned $2,000 into $502,526 in less than 3 years. His success stunned Wall Street... Read this exclusive report to find out how a small group of in-the-know investors are using this secret to turn their paltry savings into million dollar bank accounts... ********************************* Here is each Dow component listed in descending order by absolute percentage return, including dividends, from the close of trading on July 14 through the end of trading on Monday, October 16: Microsoft Corp. (MSFT:NASDAQ) 28.1% You can see that the top five Dow performers since July 14 have all achieved returns in excess of 24%. And if you look at those five stocks -- Microsoft, McDonald's, Hewlett-Packard, AT&T and Pfizer -- you will notice that all of them fall into one of two broad categories. They are either defensive, non-cyclical issues (McDonald's, AT&T and Pfizer) or technology-related shares (Microsoft and Hewlett-Packard). If you expand your search to the top 10 above, you will have covered all of the components that returned at least 18% over the last three months. With the exception of a rebound by beaten up General Motors, the remaining companies in stocks six through 10 in the above list are either drug giant Merck and telecommunications leader Verizon (both defensive issues) or technology mainstays IBM and Intel. I'm not suggesting you jump in and scoop up shares of any or all of the top 10 companies above. Many are far too extended from logical buy points and vulnerable to short-term retracements or consolidations. ********************************* Cash In On The 3 Real Crises We Face The time is now to jump on the unnoticed stocks of forward-looking companies already tackling the next 3 crises set to threaten national economies. Read on to find out how you could double, triple, even quadruple your money on these 3 crises set to break wide open... ********************************* Instead, I suggest you keep a close eye on these relative out-performers and watch how they act when the Dow Industrials pulls back to areas of support, based on trend line analysis or the location of key moving averages. Observe how these leading stocks act. The ones that hold their ground, or relinquish just a modest portion of their recent gains, are the stocks likely to continue to lead the way if the Dow decisively busts through the 12,000 level. And if one of those leaders holds up well, it's likely the sector that stock represents will also contain shares of other companies poised to do well. So, remember to follow the leaders. Those are the stocks most likely to power the Dow higher and fatten your financial capital in the process. And you can find out who they are by simply employing the concept of relative strength. Trade well, P.S.: Stay tuned to the Sleuth this week for details on a special insider buying report by James Boric. He'll be releasing the brand new 8-page report with the next two stocks that are set to outpace the markets by 19-fold or more on October 30, 2006. The report will come out at 11:00am sharp...and it will never be re-published. Watch this space for details... |
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Mark Bail has spent several years studying the financial market as well as running several options, equities, and mutual fund newsletters... <click here for full bio> |
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