March 4th, 2010

Your Watchlist – Part 3: Stocks with Strong Relative Strength

Most of my trading life was wasted on trying to be the first to buy into stocks that “were going to move” before others discovered them. I say it was a wasted effort because what I have since learned is that it’s much smarter and less frustrating to just joining the herd, running with them and also buying the stocks they’re chasing (it’s much easier to do than trying to find stocks they might chase in the future).

True there might be some emotional reward in picking a stock early on before anyone else but then you run the risk of holding it in your portfolio for several months waiting for everyone else to discover this gem you found; plus, you may be holding something they, for some reason decide never to pill onto. Yes, you found it first but 1) how long did you have to wait for everyone else to pounce on it and 2) what about all the stocks you took a sizable loss in because they never really catch fire?

How do I know which charts the herd is chasing? The market and the charts tell me. That’s why I now want to increase my chances for winners and reduce the chances for losses by: 1) making sure that I buy stocks when the market is in a clear up trend, 2) buy stocks with good momentum and 3) buy as soon after the signal the tug-of-war between buyers and sellers has ended (usually on a breakout).

In “Looking For Next Phase And Assembling A Watchlist” of February 26, I said I would offer lists of candidates that meet the above criteria through a couple of different scans:

  • Stocks in consolidation patterns after clear and convincing breakouts (New All-time Highs) – February 26
  • “Stocks on the Move” (based on fundamental and technical indicators)-March 2
  • Stocks with strong Relative Strength
  • Stocks with clearly bullish momentum indicators (e.g., all moving averages favorably aligned and pointing up)

Today’s list are stocks culled from a list of 184 that are demonstrating some positive relative strength. Of the total, 9 were previously included in the New All-Time High list and 41 in the “Stocks on the Move” List leaving 134 new stocks to choose from (click here for this complete list and on images to enlarge):

  • VRSN (Verisign)
  • HSY (Hershey)
  • SFL (Ship Finance)
  • SFI (Ishtar Financial)
  • ALL (Allstate)
  • FO (Fortune Brands)
  • PACR (Pacer)
  • MW (Men’s Warehouse)

So far that’s about 300 stocks to choose from. When the market does finally resume its upward trend there’s going to be more than enough names to pick from.

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  • Marc

    Whatever happened to the key 1150 area from January? Is the fierce resistance no longer there?

    If so, wouldn't being on the sidelines be a better strategy than buying these stocks right now since its only 1% above us? Wouldn't it be better to cede the 1% and buy the breakout of that area?

    Also, here are some other factors.

    1. We've rallied 6 straight days. We can rally a lot more than that, but that's a lot of steam coming into resistance.

    2. The inverted head and shoulders targets right at 1150 which means that the technicals are saying that the buying should be reaching the point of exhaustion.

    Joining the herd is fine. Being the last bull in the herd is just going to amount to a lot of short term losses. Regardless of holding period, that is not fun for anyone.

  • Joe

    Marc, I agree with you….up to a point. The 1150 area is seen by me and many others as an obstacle that needs to be crossed before it can be declared with greater certainty that the bull market has resumed.

    Nothing is certain in the market when it comes to the future and that holds perfectly in this case.

    As the market was coming off the 1150 high in January, I personally started selling stock in increments and moving into cash. I never suggested going 100% into cash. Likewise, it's just as responsible to now put some of that cash back to work.

    As far as the lists are concerned, the point that I'm trying to make is that it's less important picking the right stock than it is picking the right time.

    Buying a basket of any 10 of these stocks (out of 300-400) when the market starts moving up again should yield you excellent returns comparable or better than the market average.

  • DG

    Hey Joe –

    I just wanted to say thank you, publicly for calling that 1150 high, and calling that 10% drop as well.

    In 3 quick weeks, we went from 1150.45 on the S&P to 1044.50 – exactly 10.14%.

    Using DRV, I made about 30% when the market was "correcting". I turned back around and bought DRN – up over 50% today!

    Using my margin account (b/c I had so much faith in you)… I'm up over 200% in LESS THAN 2 MONTHS.

    Thank you Joe.

  • Joe

    DG,

    Your very welcome. However, I think you should take the majority of the credit. These are 3x Real Estate ETFs, not the sort of quick turnaround trade I usually make or recommend.

    It sounds like you executed these trades superbly. Not everyone could do that and I can vouch for that.

  • Wynne

    DG, how were you up 50% today on DRN? The ETF was only up 1% today. Were you trading options on it? Sorry if this is a stupid question. Thanks.

  • DG

    I wish 50% on the day… I actually meant from the bottom in Feb.

    The day I picked to switch from Bear ETFs to Bull ETFs was based on the 10% drop criteria that many bloggers proposed, and several other factors (declining VIX, rising RSI and rising Stochastics, etc)…

    It's presently right under 50% (I rounded up).