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5 Stocks Showing Relative Strength in a Weak Market - 10774 views
WINDERMERE, Fla. (Stockpickr) -- The U.S. stock market is getting pummeled today as market players fear that the odds of a global recession are now high.
The massive drop in stocks today follows yesterday’s deep slide that started after the Fed said that a complete economic recovery was still years away, adding that the U.S. economy has “significant downside risks to the economic outlook, including strains in global financial markets.”
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The grim view from the Fed has many investors worried that the Fed has fired all of its economic saving bullets. If this is the case, then for the first time in a long time, the Fed might have to just let the chips fall where they may for the U.S. economy. All of the intervention through quantitative easing up to this point has done little to pull us out of a weak economic environment, and it looks like the Fed is coming to grips with this reality.
At last check, the Dow Jones Industrial Average was down over 400 points, the S&P 500 was off by 37 points, and the tech-heavy Nasdaq was trending lower by 75 points.
On down days like today, I scan the markets for stocks that aren’t going down . These counter-trending names are displaying relative strength and frustrating the bears. If the short-sellers can’t knock these names down today, then there could be an underlying bid on these stocks that makes them attractive buys.
Stocks that aren’t going down on a big selloff in the markets could be setting up to trade higher in the near-future. Here's a closer look at some of the stocks that are bucking today's market weakness and trading higher.
One stock that’s a favorite among day traders that’s showing relative strength today is Netflix (NFLX), which offers an Internet subscription service streaming television shows and movies as well as a DVD-by-mail delivery service (which earlier this week it announced it was spinning out into a separate service called Qwikster). Netflix has been hammered so far this year, with shares off by 26%.
This stock has been absolutely crushed since printing its 52-week high in July at $304.79 a share; the stock is currently trading at around $129 share. Selling volume during the last five trading sessions has been enormous, with each session clocking in over 17 million shares traded. That massive volume is well above the stock’s three-month average volume of 5.7 million shares. Clearly, some big traders wanted out of this stock as shares gapped down from $210 to a recent low of $125 a share in the last five trading sessions. That said, the stock might now be putting in a bottom; on a huge down day like today, the stock is actually trading higher.
If you take a look at the chart for Netflix, you’ll see that the stock hit a low yesterday at $125.02 a share, and today the stock has spent most of today above yesterday's $128.50 close. If this pattern holds, and NFLX doesn’t trade below $125, then this stock has likely marked a near-term bottom that could be presenting a great buying opportunity.
It’s also worth pointing out that the relative strength index for Netflix is showing a reading of 18, which is an extremely oversold level. A stock can often rebound sharply off this level, as long as the price action stops its downtrend. If that $125 level holds, then that could be exactly what’s happening here for Netflix.
If you think NFLX has bottomed, then I would buy some near-the-money call options a few months out and play this stock for a sharp rebound. I would simply stop out of this trade if NFLX drops back below $125 a share on heavy volume.
Another stock that was displaying some notable relative strength today is Momenta Pharmaceuticals (MNTA), a biotechnology company specializing in the characterization and process engineering of complex molecules. This stock is off sharply so far in 2011, by over 25%.
The short-sellers recently did a number on this stock, knocking it down from $17.82 a share to a recent 52-week low of $10.15 a share. That massive slide occurred after U.S. regulators approved a second generic version of the popular blood-thinner Lovenox, also known as enoxaparin, which could eat into Momenta’s sales of its version of the product.
If you take a look at the chart for Momenta, you’ll see that this stock might be marking a bottom today since the stock has started to bounce off of some longer-term support at around $10 a share. That support area dates back to late 2009, so if MNTA can manage to hold above that level, it could mean the stock has bottomed.
Recently, shares of MNTA were up 4.7% at $11.12, and volume was tracking in very strong on the day, with over 3 million shares traded. This volume is well above its three-month average action of just 922,000 shares. If MNTA can manage to close up today during a massive market decline, then this stock is one you have to put on your radar for higher prices in the near future.
One could be a buyer of this stock off any weakness and simply put a stop just below $10 a share in case the bottom is not here just yet. Also keep in mind that the stock’s relative strength index reading is showing a 26, which is an extremely oversold condition. If $10 holds, then this stock could easily bounce 20% or more from here.
Keep in mind that this is heavily shorted stock, with over 15.3% of the tradable float currently sold short by the bears. If this stock has now put in a bottom, then the shorts could lock in some of their wining bets and buy the stock back, causing it to rally sharply. Remember, the bears are up huge in a just a few weeks, so if the stock can hold above $10, then look for a big rally in the near-term.
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Also displaying relative strength today is Cadence Pharmaceuticals (CADX), a biopharmaceutical company focused on in-licensing, developing and commercializing product candidates for use in the hospital setting. Cadence has rights to product candidate Ofirmev, an intravenous formulation of acetaminophen for the management of pain and reduction of fever in adults and children. This stock is off by 18% so far in 2011.
If you take a look at the chart for Cadence, you’ll see that this stock was hammered lower during the past six months. The stock hit a 52-week high of $10 a share back in early June and dropped to a recent low of $5.80 a share, which the stock hit today. After hitting that low, the stock has turned around and jumped higher to trade up to over $6 a share. What’s interesting about the strength in the stock today is that’s coming off a huge prior support level that dates back to early 2009 at $5.68 a share. It’s possible that the relative strength in CADX today is flashing a bottom for this stock in the near-term.
At last check, the stock was trading up 5% at $6.09 a share on volume that’s tracked in so far at over 180,700 shares. That volume is still well below its three-month average volume of 334,000 shares, but market players should check to see where it clocks in at the close of trading.
One could be a buyer of this stock off any weakness and simply stop out of the trade if the stock moves back below today’s low of $5.80 a share. If this stock has put in a bottom, then look for a run back toward $8 a share or possibly higher if the bulls gain control.
Also note that the current short interest as a percentage of the float for Cadence is a whopping 39%. Since this stock has such a huge short interest, the short-sellers should have been all over this one today, knocking it lower. The fact that that's not happening implies that some big buyers might be stepping in here forcing the shorts to do some covering.
Yet another biotech stock that is so far refusing to go down amid a major market decline today is Warner Chilcott (WCRX), a specialty pharmaceutical company focused on the women’s health care, gastroenterology, dermatology and urology segments of the North American and Western European pharmaceuticals markets. The short-sellers have done a number on this stock so far in 2011, with shares off by over 29%.
This company received some favorable legal news today, after a district court granted a preliminary injunction that prevents Mylan (MYL) from launching a generic version of its oral antibiotic. This bullish development had at one point today sent the stock up by over 5.5%.
If you look at the chart for Warner Chilcott, you’ll see that this stock has been beaten down big in the last few months, dropping from its July high of $24.65 to a recent low of $13.63 a share. The stock is also now trading below both its 50-day and 200-day moving averages, which is bearish. That said, the stock is approaching a major breakout above a key descending trend line that started back in early August. This descending trend line has acted as stiff resistance for two months now, so a move above it should be considered bullish.
At last check, this stock has given back a big chunk of its initial run today to $16.49 a share and is now trading at around $15 a share. This puts the relative strength theory in question until we see how the stock closes today. If it closes up, then I would consider that a bullish development.
I wouldn’t be a buyer of this stock unless you see it break out above that key descending trend line, which will trigger at around $16.60 a share. If we get that move, then add to any long position once the stock takes out its 50-day moving average of $18.04 a share on big volume. Look for volume that’s tracking in close to or above its three-month average action of 2.3 million shares.
One more stock that’s displaying relative strength today is Pharmacyclics (PCYC), a clinical-stage biopharmaceutical company focused on developing and commercializing small-molecule drugs for the treatment of cancer and immune mediated diseases. This is a market leading stock, with shares up over 98% so far in 2011.
It looks like traders continue to jump into this stock ahead of a key data releases and clinical/regulatory updates at the American Society of Hematology in December. RBC Capital recently said it expects Pharmacyclics to report positive data on two of its drugs; RBC has a $15 price target on the stock.
If you look at the chart for Pharmacyclics, you’ll see that this stock is quickly approaching a major near-term breakout if it can manage to move above $12.19 a share. A move above that near-term overhead resistance with strong volume should be viewed bullish by market-players. Traders should look for a volume move above that level that clocks in at close to or over its three-month average action of 772,000 shares.
At last check, this stock was down 5 cents at $11.81 after showing some great relative strength earlier in the day, with shares gaining 2.5% to 12.16. Once could buy this stock off any weakness in anticipation of a breakout over $12.19. I would add aggressively to any long position once the stock takes out its 52-week high of $13.09. I would use a stop just below $11 a share, which is an important near-term support zone, or simply use a stop that’s not far below where you get long depending on your risk tolerance.
The current short interest as a percentage of the float for Pharmacylcis is a rather large 8.7%. It’s also worth mentioning that the bears have been increasing their bets from the last reporting period by 6.7%, or about 243,400 shares. If this stock breaks out in the coming days or weeks, then the shorts are going to be under pressure to cover their bets to avoid any more losses. I recently featured the stock in "5 Heavily Shorted Stocks That Could Pop."
To see more stocks that are displaying relative strength in this red tape, check out the Relative Strength Stock Plays portfolio on Stockpickr.
-- Written by Roberto Pedone in Winderemere, Fla.
At the time of publication, author had no positions in stocks mentioned.
Roberto Pedone, based out of Windermere, Fla., is an independent trader who focuses on stocks, options, futures, commodities and currencies. He is also an outside contributor to Beconequity.com and maintains the website Maddmoney.net, which he sold to Blue Wave Advisors in 2008. Roberto studied International Business at The Milwaukee School of Engineering, and he spent a year overseas studying business in Lubeck, Germany.