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7 Stocks With Relative Strength to Beat the Market - views
BALTIMORE (Stockpickr) -- How “strong” are the stocks in your portfolio? With summer doldrums right around the corner, it makes sense to strengthen up your stock targets in May. Here’s how:
This month, with trading conditions still looking murky, relative strength is still 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 mid- to large-cap 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: 81.05%
Nearest Resistance: N/A
Nearest Support: $60
Shares of Vertex Pharmaceuticals (VRTX) have been on fire in the last month after phase 2 data for two of its drugs significantly aided breathing for cystic fibrosis patients. Investors piled into shares after the news release, gapping VRTX higher in the first week of May on hopes for drug revenues down the line.
That performance puts Vertex at the top of our list of relative strength names. Even though the gap higher has already happened, price action points to higher ground still for shares.
But the recent highs in VRTX are important right now too: Making new 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 VRTX pushes above today’s high water mark.
1-Month Relative Strength: 32.24%
Nearest Resistance: $43
Nearest Support: $40
Earnings are the driving force for shares of Expedia (EXPE) right now. Shares of the $5 billion travel portal rallied hard at the end of April after the company reaffirmed guidance for 2012 earnings growth, and now, the stage is set for more potential upside in shares of EXPE.
The key is to keep an eye on the $43 level.
Right now, shares of EXPE are forming a rounding pattern with resistance at that $43 level. After making a major run higher, investors need a chance to come to terms with the quick gains that have come out of this stock. That’s where resistance comes into play. After gapping up on guidance, $43 was the price level where sellers suddenly became more eager to take gains than buyers were to buy.
The rounding pattern indicates that control of EXPE is turning from sellers to buyers; I’d recommend buying the break above $43.
1-Month Relative Strength: 27.39%
Nearest Resistance: N/A
Nearest Support: $14.25
Dean Foods (DF) is another name that’s enjoying some earnings-driven momentum right now. This stock has earned relative performance of 27.39% in the last month thanks in large part to stellar first quarter earnings growth reported on May 9.
Like Expedia, shares of DF are consolidating after their big gap, but the consolidation is more of a slowing than a resistance bounce. That means that DF doesn’t need to break overhead resistance before it becomes a buy.
Even though momentum has been pushing into overbought territory in the near-term, that’s more a sign that it could become more overbought than a signal to exit shares. Instead, consider buying a starter position here with a protective stop just below support at $14.25.
1-Month Relative Strength: 24.81%
Nearest Resistance: $86
Nearest Support: $82
Edwards Lifesciences (EW) is seeing some relative strength changes of its own after announcing skyrocketing sales from the introduction of its Sapien device to U.S. patients. Even though Edward’s chart hasn’t looked particularly attractive for most of this year, this stock is looking bullish in the near-term. Shares broke out above former resistance at $82 back at the start of this month, and are now throwing back for a test of newfound support at that price level.
That gives traders a second low-risk opportunity to buy EW here.
EW’s relative strength line has been in an uptrend since April 16, one that hasn’t broken at this point. The same is true of RSI. Until some of those supporting indicators throw up a red flag, this stock looks like a solid relative strength name to buy. I’d still recommend a stop at $82.
1-Month Relative Strength: 22.87%
Nearest Resistance: $44
Nearest Support: $40
Tripadvisor (TRIP) is having a good year in 2012 -- shares of the online travel site are up more than 67% since the first trading day in January. Over that time, Tripadvisor has been locked in a near-perfect uptrend, a setup that provides a good indication that there are pockets of demand nearby for shares.
Even though TRIP is near the center of its channel, a near-term rounding pattern could mean additional upside on a break above $44 resistance.
TRIP’s relative strength line and RSI are both in medium-term uptrends right now, factors that provide positive confirmation for additional gains in this stock. Risk-averse investors should wait for $44 to get taken out before buying.
1-Month Relative Strength: 18.86%
Nearest Resistance: N/A
Nearest Support: $26
A similar setup is forming in shares of Toll Brothers (TOL), the $4.6 billion luxury homebuilder. TOL has been rallying hard ever since October, but its relative strength has only been shining more recently, when the S&P started looking more shaky.
As with TRIP, Toll Brothers has had its shares sitting in an uptrend over the course of its rally, a factor that means that demand is more easily spotted -- an important point for traders.
Even though trend line support is a while away for TOL, the fact that shares broke out above former resistance at $27 shows that buyers are still in control right now. If you decide to be a buyer here, I’d recommend support at the 50-day moving average.
American Eagle Outfitters
1-Month Relative Strength: 17.19%
Nearest Resistance: $21
Nearest Support: $19
Last up on the list is apparel stock American Eagle Outfitters (AEO), a firm that’s seen relative strength of 17.19% in the last month. From a technical standpoint, AEO has been making an orderly ascent, climbing higher off of a well-defined trendline support level, and with momentum in a long-term uptrend. That’s an especially good sign now, considering the fact that momentum is a leading indicator of price.
More recently, shares of AEO have been throwing back to test support at $19. I’d recommend waiting for more buying pressure to come in on a shorter timeframe – that happens when $21 resistance gets taken out.
American Eagle was also featured recently in "5 Companies With New CEOs to Stick With."
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.