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7 Stocks With Relative Strength to Beat the Market - views
BALTIMORE (Stockpickr) -- With the market conspicuously losing momentum in April, have investors seen the end of the 2012 rally? At this point, sources point to no.
Even though Mr. Market has been selling off right now, it’s not exactly the meltdown that it seems. The S&P 500 has managed to hold above support so far, a factor that points more to a healthy pullback in the broad market than an outright selloff. Uncertainty is still high right now -- so it pays to be tactical with your portfolio in April.
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 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: 11.99%
Nearest Resistance: $125
Nearest Support: $115
First up is $11 billion biopharma firm Regeneron Pharmaceuticals (REGN), a company that develops treatments for inflammation and eye diseases. Regeneron has been on a tear this year, climbing more than 118% since the first trading day of January -- and shares have posted relative performance of 12% in the last month. The firm’s Eylea drug is the major catalyst for REGN’s rally; the macular degeneration drug is expected to bring in as much as $300 million in 2012, double previous estimates.
REGN has been consolidating for most of the last month, trading sideways as shares bleed off some overbought momentum. That should help prime shares for their next leg up. I’d recommend sitting on the sidelines until REGN pushes above resistance at $125.
Regeneron shows up on a recent list of 10 Stocks That Boosted First-Quarter Mutual Fund Returns.
1-Month Relative Strength: 5.78%
Nearest Resistance: $140
Nearest Support: $130
Fashion accessory stock Fossil (FOSL) is another name that’s making a strong run in 2012 -- shares have rallied more than 74% so far this year. Breakneck sales growth has been the biggest reason behind this stock’s upward momentum. On the technical side of things, FOSL’s addition to the S&P 500 should spur institutional buying by funds that are required to mirror the big index’s construction.
Fossil’s chart looks a whole lot like the setup in REGN. Right now, resistance at $140 is the price that traders should be watching closely. A close above that level sends a signal that consolidation has run its course and FOSL is back in rally mode.
1-Month Relative Strength: 4.13%
Nearest Resistance: $80
Nearest Support: $75
Medivation (MDVN) is enjoying a drug-related tear of its own right now, coming off very positive Phase III data for its MDV3100 prostate cancer therapy. Shares gapped up considerably at the start of November, and this stock has been pushing higher ever since. Earnings at the end of May are likely to be the next fundamental catalyst for shares.
Even though Medivation has been consolidating since the calendar ticked over to April, this stock’s relative strength line remains in a well-defined uptrend right now. That factor points to continued upside in shares regardless of the run they’ve already had this year.
1-Month Relative Strength: 18.62%
Nearest Resistance: $34
Nearest Support: $30
Broadband wireless company Ubiquiti Networks (UBNT) is another name that’s making our list today thanks to the firm’s 76.5% relative performance (which measures UBNT’s performance less that of the broad market) in the last three months. This mid-cap company makes the tools used to create and communicate wireless broadband networks, a technology that’s been getting plenty of positive attention in the last year and change.
From a technical standpoint, UBNT is looking a bit toppy right now, with the early stages of a double-top pattern hitting resistance at $34. Even so, it’s one thing for a stock to look toppy and yet another for a short trade to actually trigger -- UBNT’s relative strength line and momentum both still look bullish right now; a breakout above $34 would be a buy signal for shares.
1-Month Relative Strength: 17.12%
Nearest Resistance: N/A
Nearest Support: $730
Meanwhile, Priceline.com (PCLN) weighs in as one of the biggest names hitting our list of relative strength trades today – incidentally, it’s a name that I also featured as one of 5 Technical Trades From Your Twitter Feed because of the attention this $38 billion travel site is getting on Twitter this afternoon.
And with PCLN testing new 52-week highs, shares could have further to run in April, today’s broad market drop notwithstanding.
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, I’d recommend sitting on the sidelines until PCLN pushes above today’s high water mark.
Priceline is one of the 10 Best-Performing S&P 500 Stocks of 2012.
1-Month Relative Strength: 4.39%
Nearest Resistance: $77.50
Nearest Support: $70
Is this the end for Lululemon Athletica (LULU)? Shares of the athletic apparel stock are down more than 5% this afternoon after posting year-to-date gains of more than 60% as of this morning’s open. And as sellers pile into the fray, investors are (rightfully) wondering whether LULU’s rally is over. At this point, it would seem that the answer is no.
While today’s selling is the biggest red day LULU has seen in 2012, it’s still only sending shares to test the support at $70 shares tested last week. While a breakdown below that $70 price would be a warning flag for traders, at this point there’s still a glut of demand from buyers willing to join the LULU trade at these prices.
Regardless of the relative strength bullishness in LULU, I’d recommend sitting on the sidelines until this shakeout runs its course.
Lululemon shows up on a list of the 10 Best-Performing Stocks in Three-Year Bull Market.
1-Month Relative Strength: 8.85%
Nearest Resistance: $105
Nearest Support: $95
Last up on our list of relative strength trades is social media site LinkedIn (LNKD), a stock that’s coming up on its one-year anniversary as a publicly traded company. LinkedIn has gotten a lot of attention from investors and traders as talk of a possible social media bubble heated up – and while those concerns have largely been warranted, the company’s more recent price action has been bolstered by fundamental performance that’s been well received by Wall Street.
Technically, LinkedIn broke out from an ascending triangle pattern at the end of March, sending a buy signal to investors. Now, though, shares are throwing back to retest newfound support at that $95 level. A bounce off of $95 this week could provide buyers with a second chance at a low-risk entry in shares.
I’d recommend waiting for LNKD’s next white-bar day before becoming a buyer.
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.