Research I did as part of writing my latest book shows that individual stocks are more likely to follow the general market rather than bucking the trend. This isn’t anything new. It’s been said in many ways, with the most famous utterance being that a rising tide lifts all boats.
What is new, however, is to define trend both simplistically and systematically such that it may be computed automatically. This automated trend following can be done for anything that trades, such as sector exchange traded funds and notes (ETFs and ETNs) as well as the indexes themselves. When done, it is possible to see if a rising tide really does lift all boats, and indeed there is a correlation. So if that's true, then does a receding tide sink them? Again, there is a correlation.
But it’s not those that follow the trend that you should pay attention to; it’s those that don’t -- especially when the tide is receding, as it is now, for those stocks that won’t follow the market down are likely to be the leaders when the market finally turns around. The best part is that they're easy to spot in such an environment. As a trader and investor, once found, all you have to do is to get some on your plate before the market begins the next run -- assuming it eventually will.
To illustrate the easy pickings, here is a chart of the S&P 500
(^GSPC) for the past four months. Notice how two ranges have developed, and that last week and yesterday, the attempt to trade back up and into the higher range failed. This market is stuck in a down trending rut and it has taken most stocks with it.
(All charts courtesy of investools.com.)
Now look at the unavoidable contrast of the charts that refuse to back down over approximately the same time frame. Here’s a snapshot of Bed Bath & Beyond
(BBBY) which continues to consolidate at the higher levels. As Mr. Market has melted it just keeps treading water.
The same is true of eBay
(EBAY), which not only continues to buy time but to test the top of its range again and again as it waits to break higher.
Even more volatile issues like Altisource Portfolio Systems
(ASPS) continue to buck the trend and try to break higher.
When the market is wheezing, sniffling, and can’t catch its breath, it's names like these that you should have on your short list. Although there isn’t any great hurry to back up the truck with the S&P 500 failing to break a swing point high (or SPH), most likely that time will come again. When strong stocks repeatedly attempt to break higher when the market is sick, these stocks will lead the cavalry in the chase for higher prices when the market finally does heal.
No positions in stocks mentioned.