6 Top Relative Strength Stocks To Buy Now

If a stock is so strong that it trends higher, even while the main stock market indexes are range-bound, the stock is said to have high Relative Strength.

Accordingly, what happens to the price of a stock with high relative strength when the broad market eventually rallies higher as well?

Those stocks typically zoom higher, outperforming the broad market gains on the upside, while also losing less than the major indices in periods of weakness.

This means that relative strength trading maximizes our upside profit potential and minimizes our downside risk (and that’s key in weak markets).

In this video blog post, we walk you through the monthly, weekly, and daily charts of six of the strongest stocks in the market right now.

Grab a pen and paper to take notes, then watch the valuable video below to know the best stocks to buy if the bulls retain control in the coming days/weeks (view in full-screen mode):



To recap, the six stocks in this video with high relative strength are:

$ORBC – Orbcomm
$MXL – MaxLinear
$MITK – Mitek Systems
$LYTS – LSI Industries
$HOFT – Hoover Furniture
$FB – Facebook
Timing Is Indeed Everything

With a selloff in January that was followed by sideways, range-bound trading action in February, the stock market has provided minimal opportunities for swing and trend traders on the long side so far this year (with the exception of the stealth Gold ETF trade that we’re still long).

However, IF the S&P 500 follows on yesterday’s (February 24) bullish hammer candlestick pattern, stocks could see a bit of bullish price momentum through at least early March.

If that happens, you now have a clean list of high relative strength stocks with the potential to show leadership, but the more challenging part is knowing precisely when to buy and sell.

For that, simply sign up now for your risk-free subscription to our stock picking newsletter and be instantly notified of our exact entry, stop, and target prices of any of these stocks we buy.

Which other high relative strength stocks are you stalking right now? Share your stock picking skills with the world by leaving a comment below…

A Different View Of Stock Market Strength And Weakness

Sometimes, an important indication of market strength is the absence of weakness.

An interesting example comes from the Stockspotter site, which offers cycle-based forecasts for stocks and ETFs.  I've tracked the cumulative number of buy and sell signals from the site since late 2013.  When there have been fewer than 10 sell signals on a given day (N = 225), the next ten days in SPY have averaged a gain of +.47%.  When there have been more than 10 sell signals on a given day (N = 317), the next ten days have averaged a loss of -.06%.  Interestingly, when there were few sell signals, the number of buy signals didn't matter.  It was the absence of weakness that was most important.

Another notable example comes from the Stock Charts site, where I've tracked buy and sell signals from technical systems for all NYSE stocks going back to mid-2014.  When we've had few sell signals in the Bollinger Band indicator, based on a median split of the data, the next 20 days in SPY have averaged a gain of +.43%.  When we've had a high number of sell signals based on the median split, the next 20 days have averaged a loss of -.14%.  In this case, the number of buy signals *did* matter; superior gains have come from having many buy signals and few sells.

Still a different pattern emerged when I tracked the number of stocks across all exchanges making fresh one-month lows.  (Data from the Barchart site).  Based on a quartile split of the data from mid 2010, when I first began archiving these data, returns over a 10-day horizon were superior when there were few new lows (bottom quartile; average SPY gain of +.60%) and also when there were many new lows (top quartile; average gain of +.81%).  All other occasions averaged a gain of only +.18%.

The takeaway here is that strength and weakness are not necessarily flip sides of the same coin.  Momentum and mean reversion effects are the results of interplays between strength and weakness, such that the absence of strength or the absence of weakness themselves become meaningful measures.  I believe this can be explained by the dynamics of market cycles, which themselves are the result of high strength/low weakness giving way to high strength/high weakness and then low strength/high weakness and low strength/low weakness.

Across multiple measures, the recent market rise has been one of low weakness.  Those expecting mean reversion have been sorely disappointed.  There is more to market behavior than mere "overbought" and "oversold"--and dissecting strength vs. weakness is one way to identify where we're at in market cycles.

Learning How We Learn: Maximizing Our Trading Environments

I recently wrote about the importance of sustaining a positive mindset by learning from our setbacks.  Confidence comes, not from doing everything right, but from knowing that you can learn from mistakes and become better over time.

But how do we learn best?  Might it be the case that we struggle as traders because we fail to play to our learning strengths?

Consider the average trading floor at a proprietary trading firm, hedge fund, or bank.  What you'll likely see is rows of traders at stations sitting side by side and surrounded by multiple monitors.  Some monitors track news events, some chart markets, some follow prices of various instruments, some keep on top of email.

Can this truly be the best learning environment for everyone?

For many traders, this environment is toxic.  It trains them to be distracted; it takes away from focused concentration.  It encourages groupthink.  It encourages superficial commentary/conversation and maximizes exposure to data--not necessarily the translation of data into useful information.

Is the learning environment better for the solo trader at home?  More multiple screens and potential data overload, with online chat substituting for the rows of traders.

When I am following markets, I have the data sent to my spreadsheets.  In spreadsheets I can actively manipulate and analyze the information in ways not possible via charts on the screen.  While engaging in those analyses, I'm not watching multiple screens.  I sit alone in an office and have no screens open for chat.  I've learned that I learn best in an environment that helps me focus--and, most importantly, that helps me sustain access to fresh ideas and intuitions.

Other traders are quite different.  They learn very well through discussion with other traders.  Still others learn by reading research articles and gaining a big picture grasp of the market.  I like to look at high frequency data and shifts in those data to identify emerging patterns in individual markets.  That is very different from the investor who develops a broad thesis and then applies it to different markets.

Research tells us that creativity is a function of two processes:  1) deep analysis of information and 2) synthesis of the information to see new connections and relationships.  The first process requires immersion in data; the second requires stepping back from data for big picture reflection.

Does your trading environment maximize true, focused immersion in information?  Does it facilitate getting away from the trees in order to see the forest?

You wouldn't live in a home that was cluttered, noisy, and unclean; why accept that as your trading environment?

What Are Your Trading Principles?

Here is an exercise:

Quickly jot down your five most important trading principles:  the rules you will not violate--and cannot violate--in order to be successful.  Write these down before you proceed with this blog post.

.....

Now take a look at how long it took you to think of and write down those five cardinal trading principles.  If it took effort to think of them and took you a while to write them down, then you've learned one thing:  Your trading principles are not front and center in your mind.  If someone asked you to write down principles of healthy eating or principles of how to be successful in a romantic relationship, you would have little problem coming up with your answer.  If you have trouble identifying your principles, you're probably trading in an unprincipled manner.

The most powerful trading principles come from an exhaustive review of our performance and a clear identification of what makes us successful.  As I stress in the recent book, those best practices can then anchor our trading processes.  Success comes from consistency in enacting our strengths; failure comes from inconsistency.  All the work on discipline cannot help us if we haven't clearly identified our trading principles and turned those into robust habit patterns.

Building Your Trading Willpower

Consider the following scenarios:

*  We decide to enter a position at a particular price level, it hits that level, and we create an excuse and fail to take advantage of an opportunity;

*  We set a stop loss on a position, but rationalize staying in the position when that level is hit, creating a loss that wipes out many days of gains;

*  We establish a process for researching markets and keeping ourselves in peak condition, but become distracted by life events and fail to follow our process;

*  We take an unplanned trade after losing money and widen our losses.

In each of these cases, we have what traders commonly call a loss of discipline.  In fact, it is a failure of willpower:  an inability to sustain intention.

Our focused attention--our intentionality--is a finite resource.  It becomes fatigued with use.  When we frame trading problems as one of lack of discipline, we treat our challenges as character flaws.  When we frame trading problems as one of lack of willpower, we open the door to strategies that preserve the willpower we possess and expand our level of willpower over time.

We are like houses with leaky windows:  we lose energy no matter how much we turn up the heat.  In such a house, you would close windows and seal the areas around them.  You would minimize leaks.  Think of all the willpower leaks in your trading house:  the lost energy staring at screens and fretting over price action you can't control (and that is noise relative to your trading horizon); the poor eating and sleeping patterns; the emotional drains of negative self-talk.  With diminished willpower, we are much more prone to distraction, much more likely to betray our best planning.

If willpower is indeed like a muscle, then the most promising strategy for trading performance is systematically exercising and strengthening that muscle.  As in the gym when we build strength, this means sustaining effort just beyond the level of our comfort zones.  This can be any effort, whether it's spending quality time with children, cleaning the house, reviewing charts, or preparing a meal.  What we do with extra effort builds our capacity to sustain effort: that extra dollop of willpower becomes our new equilibrium point.

When we cut corners and avoid effort, we erode willpower.  Like any muscle, it atrophies with disuse.  The wrong lifestyle makes us progressively less fit to trade successfully.  How we live our lives outside of trading is the best training for proper trading psychology.

The Greatest Mistake Traders Make

Thanks to Bella at SMB for bringing this video on building your inner coach to my attention.  There are quite a few gems in the video, including the idea that your inner voice--how you talk to yourself--needs to become your inner coach.  We build that inner coach by maximizing performance in the present: focusing on what we're doing now and how we can do it better.  It is the process of self-improvement that yields the outcome of success.  Or, as the video emphasizes, winning is not an outcome; it's a process.

The mistake I see traders making is that they spend the lion's share of their effort on coming up with the next trades--not on the process of winning.  They focus on making money, not on getting better.  It would be unthinkable for them to go a full trading day or week without placing a trade, but they think nothing of going a day or week with no concrete work at the self-improvement that is the source of winning.

Imagine an athlete who felt the need to enter competitions every day, not wanting to miss any opportunity to win.  So much time would be spent on the playing field or court that little or no time would be spent in the gym.  Playing time would eclipse practice time.  Conditioning would fall apart; performance would show the effect of the lack of drilling and practice.  The need to win would get in the way of winning.

That is the greatest mistake I see among traders.  They want to be on the field; they want to score.  They are fearful of missing opportunities to win.  So they don't go to the gym; they don't drill and practice; and over time they lose their edge.  Their inner voices reflect the ups and downs of the most recent performance; their inner voices are not inner coaches.  

As the video suggests, suppose your inner voice while trading scrolled across the screens of other traders.  Would you be proud to display your inner voice, or would you be ashamed?  If you wouldn't want your inner voice to go public, why would you want it filling your head?

Creating Your Trading Future

You are an entrepreneur; you run your trading business.  Here are some questions that might help you focus your efforts:

*  Are you creating a future for the business or are you mostly struggling to get by in the present?  Specifically, how much time are you spending on research and development, building the tools for tomorrow's trading, and how much time are you spending watching markets and placing trades?

*  Are you running the business in a way that would make you want to work for yourself as an employee?  Leadership is as crucial in a one-person operation as in a large enterprise.  How effective is your leadership of your trading business?

*  Is your business really growing?  Are you finding more opportunity now than in the past?  Are you trading new markets and/or new strategies or are you stagnating?  Would you choose to be an investor in your own business?

*  Would you be proud to post your PnL and your trades every day?  Suppose a film crew was filming you and your trading: would you want that film to be released?  What would someone watching that film conclude about you?

Look yourself in the mirror and ask yourself the tough question:

Do I really want to be spending the next five years of my career doing what I'm doing now?

If you're on the right entrepreneurial path, the answer to that question is a no-brainer.  If you're on the wrong path, the answer is difficult--but it's the first step toward defining your promising future.  That can be very exciting