Where Is The Action?

When the media refers to “the market”, the normal reference is to the Dow Jones Industrial Average.  As we know, the Dow is only a very narrow measure of stock market activity.  Though its constituency changes over the years to better reflect the most dynamic sectors of the US economy, it does not necessarily measure the ascent of new industries until they have been long established.  INTC and MSFT, now considered blue chip stocks were not even included in the Dow until about 20 years ago when it became clear that they were strong blue chip enterprises. As hard as it may be to believe, AAPL has only been there for 5 years.

The dynamic growth stocks are found in other market indices, notably, the Nasdaq Composite index which consists of many more aggressive issues and which more reflects the growth of American industry.

As an illustration, observe the chart below which is a six month indicator of the relative performance of the major stock market measures.  We can see the the Nasdaq index has been a much better performer before the February sell off, during the selloff and also in the recovery to date.

markets relative

When choosing investments, we always emphasize that relative performance is a good starting point for selection.  We can clearly see that if growth stocks are the target market, the Nasdaq constituents are the logical areas to investigate.  When you consider that some of the strongest Dow stocks are also in the Nasdaq, it shows that the Dow would be an even worse performer if not for issues such as MSFT, AAPL and INTC.

The relative outperformance of technology stocks of all kinds confirms how pervasive is the impact of technology and information technology to American business.  NFLX, ROKU and NVDA are well known companies that continue to outperform market peers.  But companies that are less familiar and hence under the radar, such as VRTX and CTXS have also made new all time highs during this last month of weakness.

The takeaway is that those issues exhibiting strong relative strength, even on selloffs, are the issues that will lead when markets advance again.  We would also mention that all of these stocks declined into strong up-trending moving averages which is historically a buying opportunity.

msft

nvda

Stocks that exhibit poor relative strength should not be bought (other than for compelling regression set-ups) if we wish to improve our market performance.  We discussed this in an earlier post in which we observed that financial stocks were conspicuously underperforming on the rebound.

wfc

Individuals can perform these relative strength scans fairly easily and it does not take a lot of time.  These stocks will often appear on the most active lists at the end of a trading day.  Once a list of candidates are identified, it’s still necessary to perform individual analysis for specific entry areas and consider risk/reward zones as we’ve covered in previous posts.  Doing analysis in this logical way eliminates the majority of issues that you need to follow and the focus will vastly help investing efficiency.

 

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