Markets Continue to Advance: Search For Relative Strength

As postulated in our last post, the major stock indices have managed to claw their way back after the climatic sell off in February.  While you can never be precisely sure about the reaction of markets after a dramatic move, historical precedent can provide clues as to what is likely to happen.  In general, if a strong trend is clearly in play, as indicated by ascending moving averages, such as in the case of the market indices pre sell off, then any sudden down spike into the up trending moving averages statistically becomes a buying opportunity.  As to the exact extent of the decline, that can be projected using a combination of trendlines, previous support levels and Fibonacci retracements as we’ve attempted to show.

While the market indices have bounced back over the past month, there are interesting differences between them.  As the performance chart below shows, the Nasdaq index has been the strongest, even posting a new all time high on Fridays’ close.  The Dow Jones and Standard and Poor 500 have yet to do so.

Whereas the Dow Jones stocks, represented by the pink line was strongest through most of 2017, the Nasdaq listed issues, represented by the red line, have been stronger on this retracement.  As we can note, the NYSE stocks have been the relative laggards.  We may also note the ascent of  the Russell indices which represents smaller cap stocks.  We made mention in our last posting that leadership would likely change in the next leg of the market advance.

The Nasdaq index continues to ratchet up and this is because the tech heavyweights such as Amazon, Google, Apple and Netflix are in that cluster.  In addition, semiconductor stocks such as Intel and Micron have also made new highs, both also constituents of the Nasdaq.

The disparity of the strengths can be seen if we look at the indices individually.

Again, we observe the relative strength of the Nasdaq index which has broken to a new high whereas the Dow and S&P are lagging.  While all of the indices are in defined uptrends, the indicators show a much more neutral picture on the Dow and the S&P which have traced out large symmetrical triangles as compared the Nasdaq with its much more aggressive ascending triangle.  In addition, the DX+ vs DX- statistic shown in the pink ellipses  have moved clearly into positive mode in the Nasdaq.  The only sticky issue is that the ADX line has not resumed advancing.   This could just be calculation lag.  We’ll see.

The point of this is to show that the areas in which to look for relative out performers in this next leg will be in the Nasdaq and Russell batch of stocks.

As an example, one stock which seems to have many indicators lined up positively is Marvel, MRVL.  This is a technology company manufacturing chips and integrated circuits, so it falls into the strong sector space.  It has created an ascending triangle pattern with accompanying favorable volume statistics.  It recently broke out to a new high and while the close on Friday indicates a pause may be in store, the longer trend appears very favorable.

In our analysis of stocks, we like to look for stocks which have as many favorable indicators as possible and where the risk reward calculus is reasonable.  As we are attempting to show, anyone who observes the markets closely and has access to simple tools can make informed, objective decisions on markets and investing.

Of related interest are a number of stories recently concerning some high profile investment names who are predicting  a fall of 40% in the markets ‘over the next few years’.  Let’s be clear; this is not analysis, this is headline making.  While we can’t discount anything in the future, it serves us no good to be wearing tin foil hats for an event which may never happen.  I think it’s more likely that many of us will have 40% less hair in the next few years.

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