It’s been a volatile and extremely hectic past few weeks and months, with some punishing declines in various areas of the market—the S&P 500 corrected nearly 10% from high to low, the Nasdaq almost 14%, and some areas (software down well over 30%, cybersecurity off 22%, etc.) were down even more. And of course, that says nothing about the hour-to-hour gyrations during the war headlines/rumors since late February.
Now, of course, the ceasefire has lit a fire under the market—and some of our intermediate-term indicators, too. After a more than five-month slog (the Nasdaq, remember, topped back in late October), there’s no doubt the evidence is improving and, if you’ve been defensive, putting some money back to work makes sense … slowly at first, though, to make sure the move sticks.
Of course, the question is: What to buy? If you want exact recommendations, of course, I urge you to sign up for one of my paid advisories—in fact, now’s a far better time to sign up, with the market having already gone through a few months of tough trading.
But for today’s article, I’m diving into one of the best—and easiest—ways to find potential leaders during and after a downtrend: What I call A-B-C relative strength, while looking at a few examples.
It simply involves using a near-term chart of a major index (I prefer the Nasdaq since I focus on growth stocks) and a chart of the stock you’re evaluating. As opposed to many, what you’re looking for is resilience—if a stock has good numbers and a good story, and it’s able to hold up in a meaningful correction (which this has been), that’s telling you big investors are either unwilling to sell much of it, and/or are supporting it (building positions) on dips.
Then you look for a handful of near-term low areas during the downtrend in the Nasdaq (I label them A, B, C and so on), and line those up with the stock. If a name is hitting higher lows while the Nasdaq is doing the opposite over many weeks, it’s often a sign of good things to come.
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A Closer Look at Relative Strength
Thus, let’s look at the Nasdaq since the late January top—let’s roughly call point A the early/mid-February low area; point B the slightly lower low in early March-ish; and point C will be the late-March puke low before the big rally this week. (You can put as many points on it as you want, but three usually does the trick.)
Now let’s look at a few names. First, the Roundhill Big Tech Fund (MAGS), which basically tracks the Mag. 7. You can see the stock was in gear (and even weaker) than the Nasdaq as a whole, sinking lower at point A, and hitting hugely lower lows at B and C before the recent bounce. Even here, by the way, notice how MAGS is below its 50-day line by a good margin, while the overall Nasdaq is a few hundred points above its 50-day line
It’s a similar story when looking at some general growth funds. Take a look at the ARK Innovation Fund (ARKK), which imploded to a new low at point A, and while it had a slightly higher low at B, it joined the downside party in March with a lower low—and again, it’s below its moving averages today while the Nadsaq is above its own.
However, what’s encouraging is that the deeper you dig, the more you actually see relative strength popping up from growth areas—and this was occurring even before the post-ceasefire pop. One of many examples would be Modine Manufacturing (MOD), which is emerging as a leading player in cooling equipment for data centers, which is basically a must-have. There are many players in the space, but after a company-changing sale of a legacy business, it’s a pure-play on cooling—and the top brass thinks sales for this business can growth 50% to 70% each of the next couple of years, with huge profits, too, possibly $8 per share in the year ahead.
Then there’s the chart: MOD did sink to a low in late February, but notice how it held its 50-day line (far better than the Nasdaq) and has been etching higher lows ever since, with a pop near its highs after the ceasefire.
Another idea is TTM Technologies (TTMI), a leader in advanced circuit boards that go into both data centers and a lot of space/aerospace applications. It got hit with the market (and earnings) in early February (point A), but notice how it then hit slightly higher highs for the next few weeks (B and C) and has since exploded higher.
Of course, if you want to enter strong names, portfolio management (how much to buy, where to place stops, where might you buy more, etc., etc.) is key—as well as having a market timing plan on when to pare back should the rally attempt go up in smoke.
But the point here is that you don’t need an advanced screening system or inside information to see what stocks the Fidelitys and T. Rowe Prices of the world are buying—given the months of tedious action, you just need to compare some charts to get a quick glance at what could have a huge run should a new sustained uptrend be underway.
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