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7 Relative Strength Stocks to Beat the Market in 2012 - views
BALTIMORE (Stockpickr) -- As we tick closer to the end of the trading year, traders are still wondering whether stocks will be able to get their heads above water before the calendar ticks over to 2012.
Frankly, it’s been tough going for investors in 2011. Everywhere you turn, there’s a story about a legendary fund manager getting hammered or a rationale for why stocks are getting smacked lower. Year-to-date, the S&P 500 index has dropped by close to 4%, but along the way it’s squeezed even bigger profits from both longs and shorts. And as we approach year-end, things aren’t looking terribly auspicious for investors either.
But that’s not exactly the whole story.
On an individual basis, some stocks have performed exceptionally well in 2011. While high correlations are still a problem for investors, a stock that has a high correlation with “the market” can still dramatically outperform it. The question is how you find those stocks beforehand; the answer is relative strength.
With year-end just a month away, relative strength is one of the best tools we have to identify stocks that are likely to beat the market in 2012. So how does it work?
Put simply, relative strength is a ratio of a stock’s price to a broad market index. The ratio itself isn’t important -- instead, it’s the trend of the ratio over time that’s investible. According to academic research, relative strength is a statistically viable strategy over a one-to-10-month time horizon; that’s the timeframe we’re focusing on today.
To find the seven names that made this list, I used a quantitative screen to rank the top S&P 500 names with relative strength over several timeframes, then I weeded out the more attractive names using technical analysis.
The result is a set of relative strength trades that should outperform as we enter 2012.
Delta Air Lines
1-Month Relative Strength: 20.39%
Nearest Resistance: $9.00
Nearest Support: $8.00
Shares of Delta Air Lines (DAL), one of TheStreet Ratings' top-rated airline stocks, have put on a good run in the last few weeks, buoyed by a bankruptcy in rival AMR (AMR) that investors are hoping will lead to more passengers opting to fly the Delta skies in 2012. Despite today’s large drawdown in shares of Delta, this stock has sported bullish technicals since the broad market’s bottom back in August. Traders would do well to jump on a breakout above $9 resistance.
Right now, Delta is forming an ascending triangle setup with resistance at $9 above shares and uptrending support below. While Delta had shown early signs of a breakout in Friday’s session, the breakout failed to confirm today, and the firm is giving those gains back.
A more material break of $9 is going to be needed to justify taking a position in this stock. When it happens, I’d recommend a protective stop just under the 50-day moving average
1-Month Relative Strength: 17.22%
Nearest Resistance: N/A
Nearest Support: $52.00
It’s been a stellar year for shares of Oneok Partners (OKS), an $11 billion natural gas storage and transportation MLP. Shares of the partnership have rallied more than 41% so far in 2011 thanks to favorable prices in the natural gas liquids that course through the firm’s pipelines.
That outperformance has continued more recently, with relative outperformance over OKS’ benchmark ringing in at 17.22%. From a technical standpoint, that rally looks capable of continuing into 2012.
This stock has seen a number of breakouts in the last month, pushing above pockets of supply at the $50 and $52 levels since the start of November. Momentum, as measured by 14-day RSI, has remained in an uptrend for most of the year -- as long as it remains in tact, investors should continue to expect shares to appreciate in the new year. At the same time, heavy commodity exposure offers appealing diversification from dollar-denominated assets.
1-Month Relative Strength: 26.16%
Nearest Resistance: $14
Nearest Support: $11.50
Assured Guaranty (AGO) is a mid-cap bond insurer that’s largely gotten shellacked in 2011, sliding more than 26% as investors fled the risks associated with insuring municipal bonds. In a market where the fear of a second financial collapse is driving flights-to-quality, it should come as no huge surprise that investors are stepping around a name like Assured Guaranty. But on a tighter timeframe, this stock is starting to look more attractive.
More recently, Assured Guaranty has been outperforming the broad market as shares approach longstanding resistance at $14. While that price level has acted as a “ceiling” for shares the last three times buyers have tried to wrest control of AGO, a breakout above that level would be a strong buy signal.
On the move above $14, I’d recommend keeping a protective stop right below nearest support at $11.50.
Assured Guaranty shows up on a recent list of Stocks With Big Insider Buying.
1-Month Relative Strength: 16.65%
Nearest Resistance: $44
Nearest Support: $36
Online health information portal WebMD (WBMD) is getting considerable attention this month, buoyed by news that private equity firms could be looking to acquire the company. That speculation is driving bullish technicals in shares of WBMD.
Right now, shares are making an ascending triangle bottom off of early October lows in shares. Shares broke out above previous resistance at $36 and have started filling the gap that the stock left open thanks to a major guidance miss in mid-July.
From a technical perspective, the existence of a gap on WebMD’s chart is a bit like a supply and demand void. Because shares haven’t traded through those prices in the past, it’s likely we’ll see shares make their way higher to resistance at $44 before they hit a pocket of supply for shares.
Alaska Air Group
1-Month Relative Strength: 16.58%
Nearest Resistance: N/A
Nearest Support: $70
Following in Delta’s example, Alaska Air Group (ALK), another of TheStreet Ratings' top-rated airline stocks, has been rallying hard in the wake of the AMR bankruptcy announcement. Unlike most of its larger peers, though, Alaska Air is actually up dramatically on the year -- 32.5% to be exact.
ALK benefits a bit more directly from AMR’s bankruptcy than others, however: It got AMR’s spot in the Dow Jones Transportation Average, a 117-year-old market index that’s used as the basis for sector funds with billion of dollars under management.
Shares pushed through former resistance at $70 last week, overcoming a price level that had restrained shares since the start of the summer. While we’re seeing a pullback today, Alaska Air did make new 52-week highs shortly after this morning’s open. Barring a breakdown below $70, this stock looks likely to continue its upward trajectory.
1-Month Relative Strength: 14.25%
Nearest Resistance: N/A
Nearest Support: $33
Omnicare (OCR) is another name that pushed through a strong resistance level to new 52-week highs last week, making its way definitively above the $33 level on Thursday. The company, which provides pharmaceutical services for healthcare institutions, has been having a volatile year in 2011, rallying more than 32% on the year in spite of a fall through to negative territory as recently as October.
Like a number of other names showing high relative strength lately, Omnicare has pushed to new highs in the last two weeks. Making new 52-week highs is significant from an investor psychology standpoint because it means that everyone who has bought shares in the last year is sitting on gains. As a result, the “back to even” mentality is less of a concern than it would be for a name with a higher proportion of shareholders sitting on losses.
1-Month Relative Strength: 12.35%
Nearest Resistance: N/A
Nearest Support: $33
Another pharmaceutical name showing nearly identical relative strength right now is Bristol-Myers Squibb (BMY) a $58 billion drug maker that’s outperformed the S&P 500 by nearly 34% this year. Like Omnicare, BMY, one of TheStreet Ratings' highest-yielding drug stocks, pushed through an important resistance level earlier this month (coincidentally at $33), and this stock is currently showing traders a momentum-buying opportunity.
As with OCR, a protective stop at the 50-day moving average is the best way to protect against waning demand for shares of BMY.
I also featured Bristol-Myers in "7 Dividend Stocks Shoveling Cash to Shareholders."
To see these stocks in action, check out the at Relative Strength Trades portfolio on Stockpickr.
-- Written by Jonas Elmerraji in Baltimore.
At the time of publication, author had no positions in stocks mentioned.
Jonas Elmerraji, based out of Baltimore, is the editor and portfolio manager of the Rhino Stock Report, a free investment advisory that returned 15% in 2008. He is a contributor to numerous financial outlets, including Forbes and Investopedia, and has been featured in Investor's Business Daily, in Consumer's Digest and on MSNBC.com.