Looking for Relative Strength in a Down Market

Since April 27th, the day the Greek Credit Crisis raised its ugly head, the Dow Jones Industrial Average has dropped over 12% (1,391 points top to bottom).  With yesterday’s 274 point rally and a 38 point follow through day today, the DJIA has broken above the downtrend line the market has been subject to.  This is a sign of strength and might be signaling the market may be turning up.  One thing to think of when picking a stock now is to look for relative strength – those stocks that did well as the market dropped may do even better if it turns up.

The DJIA is now 28 points below its 200 day exponential moving average which could stop any rally, but coming off a move down such as this, an upside move through the 200 EMA is very possible.
I like watching the stocks that still showed strength even while the market was tanking.  Flipping through hundreds of charts I have found the following stocks that maintained their uptrends  or hung strong through the down trading days;

AKAM, LM, LULU, FFIV, LH, DTV, and AZO

These three stocks have been powerhouses over the past months and have strong charts;

NFLX, CRM and VMW

LM – Legg Mason Inc. – The surprising thing about this stock is that it is a broker/dealer and the financial sector has performed abysmally as of late.  We have had news out about new financial regulations along with the steady drumbeat of war coming out of Washington D.C. against the banks, yet this stock still outperformed.  LM traded a 52 week high of $34.83 on May 15th and with a little market strength in the next week I could see this stock taking out its high.  The 50 day EMA for LM is $30.66 and the stock closed today at $32.37.  If the stock closes below $30.50, use a sell stop to get out.  This gives you a possible loss of $1.87 with the upside I see possible being above $36.  This is clearly one of the strongest financial companies out there today.

AKAM – Akamai Technologies Inc. – Today the stock closed at a 52 week high at $44.30.  This strength is shown with a chart that ramped up on February 26th.  Whatever they are doing at this company, the market loves this stock, but be careful as the P/E is 50, which is not low.

LULU – Lulumon Athletica Inc. – The chart for this stock looks good and with support from the 50 day EMA just $2.50 lower at $39.38 your downside is limited.  I look for a minimum of 2x my risk for a good trade and this stock could easily go to $47 if the market is strong.

FFIV – F5 Networks Inc. – Since last year’s market bottom this stock is up 276%.  Not bad at all.  The stock held its gains while the markets have sold off over the last five weeks.  A market advance could pop this stock through $75 easily (closed at $69.95).  A close below the 50 EMA ($67.09) and I would sell it but I see upside that could carry it to $80 and higher.

LH – Laboratory Corp. Amer Holdings – At $78.24, less than two dollars above its 50 day EMA ($76.38), this a good place to buy this stock.  Limit your downside with a sell stop at $76 ($75.98) and wait to make your money.  Strength In the market could propel this stock above $81 and given some time the stock could go a lot higher.  The P/E is only 15.37. 

DTV – DirecTv – This stock has almost doubled since its bottom last March and is in a nicely defined uptrend right now.  I like the product, and while the P/E may be a bit high, you pay up for quality.  Being in an uptrend gets you a rising support level (the uptrend line).  Today’s close at $38.47 is just $1.75 above its 50 EMA ($36.72) and the uptrend line is above that with support at about $37.  If this stock maintains it current trend it will trade above $45 in a few months.

AZO – Autozone Inc. – This stock has been strong and in an uptrend since November.  AZO currently has a P/E below 15 and you can buy it closer to its uptrend line support now as the market weakness has pushed it back a little.  If the stock trades below $184 start to get worried, but it could keep going through $200 with a market tailwind.

NFLX – Netflix Inc. – This stock is a powerhouse and just does not want to stop.   With low overhead and high cash flow I am betting the analysts love this thing.  The stock has climbed from the $40’s to $120 since September and could easily go higher.  Buy it here ($120.89) and sell stop it at $109.90.  $11 of downside is possible but the way this thing is going, if the overall market stabilizes, $150 is not out of the question.

VMW – VMWare Inc. – Sporty a very high P/E of 136 this thing just keeps going higher.  Their industry (cloud computing) has been said to be the new turn in technology that will put Microsoft out of business.  Right now the stock is near the high end of its uptrend channel so buying a pullback would be nice.  BUT – this strength in a bad market should be telling you something – this lion may be ready to roar.

CRM - Salesforce.com Inc. – Winning today’s REALLY HIGH P/E award with a 151 mark, this stock just keeps going up.  Rather own it a little lower but if it walks like a duck, etc…  Buying strength usually works out.

Friday, June 11, 2010