Beginning in August after the brief, sharp selling storm, leading growth titles began to change character, zooming higher on earnings and often kissing new high ground by month’s end.
September definitely brought some wobbles and tricky trading, but during the past couple of weeks many strong names have continued higher while other names emerged from consolidations. But buyers are flexing their muscle, which is all to the good.
Now, we’re also not leaving our brains at the door in the short term, as the election is rapidly approaching (we don’t trade on that, but some hedging/positioning is to be expected), Treasury rates continue to perk up since the Fed cut rates (the intermediate-term downtrend in rates has definitely been snapped) and near-term sentiment is certainly elevated according to a variety of measures, be it the number of new highs or weekly surveys.
All of that has us picking our stocks and buy points carefully.
And when it comes to picking stocks, relative strength is one of the most-used tools in our toolbox.
There are chart studies you can use that crunch the numbers for you, but one easy way to do it is just to compare the overall (relative) price levels of a stock and an index.
Simply put, we line up the near-term high and low points in an index and compare that to individual stocks.
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 early-September low. 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 were still hanging around those highs even as the Nasdaq sagged (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 even as the Nasdaq sagged, GEV pushed to higher highs (point D).
Of course, in the midst of earnings season, 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.
