One of the best ways to spot potential new leaders is using relative strength—and, ironically, the easiest time to do that is when the market is having some issues. Usually, you can use what I call the “ABCs of relative strength,” lining up near-term high and low points in an index and comparing to an individual stock.
When I look at the market’s bigger picture, I’m still thinking the next big move is up for many reasons. The long-term trend is still up, of course, and that’s #1 in my book. Big-picture sentiment, meanwhile, remains lukewarm (certainly not overheated), numerous studies surrounding the market’s action suggest higher prices and, of course, the Fed is likely to start an easing campaign next week.
However, for the here and now, things are looking iffier: After a great recovery in August (another longer-term bullish factor in my view), the action last week was a yellow flag, with all indexes dipping below support, led by the popular former leaders (mostly chip names).
Don’t get me wrong, I remain flexible—a good few days with some power could make all the difference—but given the selling and some other factors (defensive areas have been leading, and financial stocks are starting to crack), I’m still cautious for now, at least when it comes to growth stocks.
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With that said, I’m spending more time than ever on research—with the market in a corrective phase, now is the time that the next wave of leaders is setting up their next move. Given that the big money is made in the big swing (owning leading stocks during a sustained run), I’m scanning the action and digging into new stories just about every day.
This makes it a perfect time to highlight those ABCs of relative strength I mentioned up top.
I used this exact strategy to spot some big winners this time a year ago. Take a look at the Nasdaq during the summer and fall of 2023; you can see a three waves down pattern, with three lower lows and two lower highs into the market bottom near Halloween.
Now take a look at CrowdStrike (CRWD) during that time: It actually hit two higher highs in August (after earnings) and October and two higher lows, a sign it wanted to head higher if/when the market got in gear. Sure enough, CRWD took off and was a great winner for us.
Admittedly, the current market pattern isn’t quite as clean as last year given the dramatic August wipeout/comeback, but it’s still possible to do some simple relative strength analysis comparing some of the recent highs and lows. Let’s start with the Nasdaq: We’ll call point A its July high – point B its early August low – point C the late August high – and point D the recent low since Labor Day. That gives us a framework to compare.
Now let’s look at ServiceNow (NOW), an emerging blue chip in the cloud software field that appears to be one of the first winners in terms of integrating AI functionality into its offerings. Shares held up much better than the Nasdaq during the July/August selloff (points A and B), hit a marginal new peak at point C (stronger than the Nasdaq) and are still hanging around those highs even as the Nasdaq sags (point D).
Another example would be GE Vernova (GEV), one of the three now-independent entities that made up the “old” General Electric—it’s a slower grower but should morph into a free cash flow machine as it has its hands in most power, electrification and wind power cookie jars. As for the stock, GEV got hit during July/August (points A and B), but shares quickly moved to new highs in late August (point C), and now, even as the Nasdaq has sagged, GEV is pushing to higher highs (point D).
Of course, until the correction is definitively over, good stocks can go bad in a hurry—but I think many stocks are starting to grab pole position, setting up as new leadership for what I see as an eventual next leg up. And relative strength is just one of the ways we find them.
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