Relative    Strength

If you turn over 10 stones, you might find 1 attractive investment idea but if you turn over 100 stones, you might find 10.

By Peter Lynch (Manager of Magellan Fund 1977 - 1990)

$SPY  is up nearly  +25%  since it hit the bottom on March 23rd - 13 sessions ago.  We had a  "Follow Thru"  day on April 2nd with the  $SPY.  Monday April 6th,  $NASDAQ  posted  a  "Follow Thru"  day as well.  $RUT  has bounced up over  +18%  from its low attained on March 18th(16 trading sessions ago).  These are all good signs of institutions getting back in the market.  Retail investors should have started taking very small stock positions on Friday April 3rd.  It's quite possible that the market could fumble and test the lows of March 23rd.  Both the indexes - $SPY  and  $QQQ  are still below the 50 day sma(simple moving average).  That is a big negative.

One of the tools to utilize to build a stock watch list is  Relative Strength (RS) of a stock.  During market correction, look for stocks that are holding up well relative to the general performance of the market as expressed by the performance of  $SPY.  Identify stocks that are not correcting as much and resisting the correction.  Institutions control  75%  to  80%  of the daily trading volume in the market.  Stocks that are holding up well during correction is an indication that the institutions are holding onto them while dumping the laggards from their portfolio.  That is how you identify stocks that make big gains over a period of several weeks, months and years.  That is how one lands winning stocks like $AMZN, $NFLX, $CMG, $TSLA, $NVDA and others.  These are the stocks that barely budged during market correction before they made their triple digit gains.

IBD(Investor's Business Daily) plots a blue line (RS line) under the price bars.  Rising blue line relative to the  $SPY  line indicates that the stock is performing better relative to the general market as expressed by the performance of the  $SPY.  There is also an RS ratings number listed at the end of the  RS line.  This number compares the stock to all the several thousand stocks that are on IBD's data base.  1 is the lowest and  99  is the highest rated stock.  Personally I only look for stocks that exhibit an RS ratings of  95  or greater.  These are the best of the best Growth Stocks.  They are the ones that have a higher probability of making huge gains when we experience a  "Follow Thru"  day.

  Stock Watch List with High RS ratings and RS line

In my post 2 weeks ago (March 29th blog post), I had a list of 19 stocks that were some of the leading stocks while the market was correcting.  They had corrected less than the  $SPY  and were trading above the 200 day sma while both the  $SPY  and  $QQQ  were well below the 200 day sma.  A very small test position on 9 of these stocks was initiated on Friday April 3rd at market open.  These stocks were trading above the 50 day sma while the  $SPY  as well as  $QQQ  were below the 200 day sma.  3 of the 9 stocks survived my strict criteria of selecting stocks that exhibited a high  "Relative Strength"  and an  RS  ratings above 95  since the  "Follow Thru"  day.  Their performance during the last 5 trading sessions is:

1. $XLRN   ... +8.77%
2. $MACI   ... +9.77%
3. $NEM    ... +18.62%

Average performance for all 3 stocks is  +12.39%.

$QQQ  performance was  +8.59%

$SPY  performance was  +10.94%

Utilizing  Relative Strength  line and  RS  ratings above 95 resulted in identifying stocks that outperformed both the  $SPY  as well as  $QQQ.

Happy Trading!

Amin