- 5 Defense Stocks to Trade for Gains This Week
- 4 Big-Volume Stocks in Breakout Territory
- 3 Stocks Rising on Big Volume
- 3 Stocks Spiking on Unusual Volume
- 5 Hated Earnings Stocks You Should Love
7 Relative Strength Stocks That Should Outperform - views
BALTIMORE (Stockpickr) -- The rally is continuing in 2012, with the door closed on the best February for the S&P 500 in 14 years. That’s on top of similarly strong January performance. All told, the broad market is up more than 9% so far this year.
Now the question is whether this stretch of positive performance will be able to continue into March.
From a technical perspective right now, it looks like that’s going to be the case.
With this 2012 rally here in full force, relative strength is one of the best tools we have to identify stocks that are likely to beat the market this year. 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-ten 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 weeded out the more attractive names using technical analysis.
The result is a set of relative strength trades that should outperform as we push through 2012. Here’s everything you need to know.
1-Month Relative Strength: 60.98%
Nearest Resistance: $70
Nearest Support: $60
Retail giant Sears Holdings (SHLD) has been one of the best performers year-to-date, more than doubling as investors pile back into shares. Sears has been one of Wall Street’s whipping boys for a while now, caused in large part by the firm’s deteriorating fundamental performance and inability to stand out in the crowded retail environment.
But clearly, that sentiment has changed in 2012.
While Sears’ fundamental prospects are still being hotly debated, let’s focus on the firm’s technical prospects for now. Shares bottomed right at the start of 2012, then rallied to $50 resistance before gaining buyers and pushing back through to $70 on news of the firm’s asset-shedding turnaround plans.
Right now, SHLD is consolidating right underneath that $70 support level. A push above that price should be considered a buy signal.
1-Month Relative Strength: 35.72%
Nearest Resistance: $77.50
Nearest Support: $72.50
That brings us over to Whirlpool (WHR), a stock whose fate just happens to be intertwined with that of Sears. Around 20% of Whirlpool’s sales come from Sears’ stores, so it’s no big surprise that WHR dropped like a rock when Sears posted news about store closings -- or that it rallied back with the firm following its turnaround announcement.
Like Sears, Whirlpool is consolidating just under resistance right now, in this case at the $77.50 level. The trading implications are effectively the same in both stocks right now; traders should consider a push above $77.50 resistance a buy signal.
1-Month Relative Strength: 34.06%
Nearest Resistance: $86
Nearest Support: $80
Independent oil exploration and production company Cimarex Energy (XEC) has made an impressive run in 2012, rallying more than 33% following the release of production guidance for the year ahead that beat analysts’ expectations. Cimarex announced that it expects to pull up to 10% more oil out of the ground this year, a particularly positive bit of news given the prolonged high oil prices that XEC and other oil firms have been enjoying.
While shares peaked in late February, and turned lower to end the month, there’s reason to expect more upside in shares of this $7 billion firm. Today in particular, shares are catching support at $80, an important factor that reduces downside risk for shares. Because there’s a glut of demand below $80, traders have some extra protection for their long positions in XEC.
At this stage, I’d recommend waiting for a move above the firm’s $86 peak before betting on shares.
Cimarex shows up on a list of 16 Stocks Picked by Prize-Winning Fund Managers.
1-Month Relative Strength: 33.85%
Nearest Resistance: $62
Nearest Support: $56
Dillard’s (DDS) is another retail chain that’s enjoying significant relative strength over the broad market in 2012. Not surprisingly, with investors still knee-deep in the tail end of earnings season, Dillard’s rally has been fuelled by the firm’s fourth quarter numbers. The firm announced earnings of $2.21 in February, increasing the firm’s profitability by 43% versus the same quarter last year.
As we head into March trading, that momentum appears to be in full force.
Shares are consolidating a bit in today’s session, cooling off after rallying for each of the last eight trading days. While that’s been great for existing shareholders, for traders new to DDS, this setup looks less appealing than the others we’ve looked at. It’s very possible that we’ll see a throwback to test support at $56. Wait for a new 52-week high before buying.
1-Month Relative Strength: 31.77%
Nearest Resistance: $2.60
Nearest Support: $2
Mobile broadband network Clearwire (CLWR) boasts the achievement of creating the first 4G mobile network in the country. Unfortunately, that network comes at an exorbitant cost, one that’s yet to be covered by the firm’s operations. So while revenue growth has been breakneck for the past several years, an unprofitable model in a weak market is a recipe for a selloff. But that’s been changing since the start of the year.
Right now, Clearwire is forming a bullish ascending triangle setup with resistance at the $2.60 level, and uptrending support below shares. In an ascending triangle, shares bounce between those two technically significant levels, all the while getting squeezed closer to a breakout above resistance. When that happens, being long becomes a high probability trade.
On that cue, I’d recommend putting a protective stop at the 50-day moving average.
Clearwire shows up on a list of Telecom Stocks Bought and Sold by Hedge Funds.
1-Month Relative Strength: 31.72%
Nearest Resistance: $36.50
Nearest Support: $35
Outdoor store chain Cabela’s (CAB) is another name that’s pushing its way to new 52-week highs this week on momentum from positive earnings. That’s bringing along some bullish implications for investors right now.
So why exactly do higher prices bode well for shares? It all comes down to the number-one driver of stock prices: market psychology.
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.
For late-to-the-game buyers, though I’d recommend sitting on the sidelines until CAB finds a closer support level.
Level 3 Communications
1-Month Relative Strength: 30.65%
Nearest Resistance: $26
Nearest Support: $22
Last up is Level 3 Communications (LVLT), another communications stock that’s shown stellar relative strength since the start of the new year; shares have rallied almost 50% since the first trading day of January.
Level 3 is currently forming a long-term rounding bottom pattern in shares, a setup indicates a gradual change in sentiment among market participants. The breakout signal for this pattern is a move above the top of the rounding bottom -- that resistance level to watch is currently $26. On a push above that level, I’d recommend putting a protective stop just under the 200-day moving average; it’s the nearest support level that could warn that the momentum is broken in LVLT.
Level 3 shows up on a list of Telecom Stocks Bought and Sold by Hedge Funds.
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.