One of the comments I often address is whether only buying stocks that are making new highs is the best methodology.  If you are an active trader, this makes sense because you want to go where the momentum is.  While stocks do ebb and flow, it makes sense to be invested in the strongest stocks at any time and those will be the ones showing up in the new highs list.

This does not exclude stocks that are near their lows IF they are making RECENT new highs especially after a period of dull underperformance.  We discussed in previous posts about contrarian trades and noted their explosive potential if coming out of a long term base.  In fact we’ve seed this already occur in some of the oil and drilling issues, HP, SLB, XOM, discussed in the April 17th post.   Many have already had 20% moves in just over a month. In addition, the history of market cycles tells us that during any given phase of a market’s trajectory, there will be leading groups and lagging groups and that leadership will change as the economic expansion matures.

Generally, as the momentum slows on the leading stocks, some attention begins to be focused on the laggards which will respond in part to the economic consequences of the leading stock groups.  As examples, commodity stock groups tend to start to increase their relative strength during the latter stages of a market expansion.

Another group which exhibits general strength are the ones covering smaller capitalization issues as confidence begets aggressive buying in such riskier issues.  We can see this lag in performance by observing the chart below which compares the relative performance of broad stock sectors.  At the moment, there is plenty of angst about over valuation of the markets but history shows there are some distinct signs at market tops.  They include unbridled confidence in the markets manifest by wide speculation in small cap stocks as was the case of the famous tech bubble top in 2000.  At the moment, the overwhelming state of mind is angst that prices are excessive, not usually the sentiment you’d see at a top.

Clearly we can see that it has been the Nasdaq listed stocks that have handily out performed the other indices of the Dow, S&P, NY composite and the Russell. Lagging far below are the commodity products as measured by the USCI index fund.

We can’t state that the leadership will imminently change, but we are on the alert for relative performance of issues in the smaller cap and commodity space which may begin to assume leadership as time goes on.  When issues begin to break out of long sideways ranges with increasing volume, the tide may be turning.  Thus, even though these issues may not be at all time highs, when they make new RECENT HIGHS, we want to be involved.