Below is a toolset to help you build a watch list for bullish stocks this week. Our fundamental driving principle is to find stocks that are most in demand around the globe and therefore most likely to rise in price. (And for AA and other bears out there, an exact opposite plan, to profit off of stock weakness, can be based on relative strength). Large financial institutions control most of the buying and selling, and the finite supply of stocks subject to speculation will rise or fall in price as so-called Big Money institutional investors accumulate or distribute stocks over time. That's a key. Unlike us small potatoes investors, most institutional traders must acquire investments at such scale, they risk driving prices up too fast if they try to acquire their positions too quickly. So, they scale (sneak) into their individual allocations, and their efforts to acquire stock happens little bit at a time. Relative strength analysis can give us an idea of which securities are being accumulated like this and perhaps which are being sold off. We do this by following price movement and comparing changes in value over time to a central benchmark, such as the S & P 500 or ETF SPY.
One might argue that institutions ARE the market. So, if we follow the relative strength of price trends at the index, sector, industry and individual company-competitor level and compare price moves to the movement of SPY, our sleuthing can give us a sense of how investments are likely to trend over time and in comparison to many other investment choices. It's sort of like grading on a curve, we're not just looking for assets to increase in value, we're looking for larger price increases than average and lower odds that a stock will reverse in price. The result of our analysis is to identify investment opportunities likely to reverse or continue rising in price. It's a systematic, repeatable and consistent way of anticipating price moves ahead of time. Nope, it's not a divining rod. Simply a way of comparing patterns of relative price movement that give the investor an edge over another trader, who might simply be flipping a coin to determine his or her posture on a particular security.
Our macro-Monday video will cover this week's relative strength analysis in greater depth. Once you've watched that, come back to the table below and try analyzing the market yourself by following the strength via the path I've laid out below:
List of Very Liquid Stocks in XLK
Once again this week, our rules pushed us into liquidations. Due to weakening relative strength, we liquidated half of our $EPI position, and captured a nice gain in the process. We also liquidated the balance of our $EWY position for the same reason. Of course, liquidations free up cap space and we put most of that capital back to work. We added to our positions in $UGA and $COPX. Watch todays video to see how we use Chaikin Analytics alongside our own rules to manage a paper ETF portfolio.
These are some of the more liquid ETF's available to trade. I ranked them based on relative strength to SPY using the 60 day lookback period. That's the leading edge of our "sweet spot". As we see rotation rank improve into the the 60 to 120 day time frame, with moving average relationships bullish and RSI readings above 60, we have the perfect backdrop to check Chaikin Analytics for Very Bullish stocks exhibiting the usual Chaikin characteristics for a bullish trade. Look at the ETF IYR, for example - a text book intermediate rotation ETF. Over the past 160 days, it's moved from 27th ranked to 9th ranked, edging into the top half of the rankings in the 60 day column and maintaining bullish rankings even into the shortest time frames. Notice the short, medium and longer term moving average relationships are all bullish and the RSI is at a bullish 67.22. W
As an ETF making its way from the depths of the relative strength comparison rankings, IYR is is currently overbought but right at the earliest stage of a possible bullish personality change. IYR's ratio of bullish to bearish rated underlying stocks is 10:1. Money flow and 6 month relative strength have peeped above neutral, but with the ETF Power Gauge remaining yellow. At the close of this week's trading, Chaikin Analytics indicated a relative strength "buy" signal, one that plays out over a 3 month timeframe. Some traders with extended time-frames don't worry about the high position of the OB/OS oscillator, but position size defensively since intermediate support is under $84 dollars and the stock is trading at well above $90. Others will let the oscillator roll lower to either oversold or to a point in the chart where its downward direction reverses and rolls up. That reversal is the entry day. Others, may put half a position on at this level and be prepared to complete the trade and become fully invested when the stock OB/OS oscillator moves to oversold then reverses. My preferred strategy is to sell a front month 40 delta OTM call and buy a 7o delta long dated deep in the money call as a surrogate stock replacement. If the osciallator and stock roll down appreciably, i'll buy back the short call for a 70% ish gain and then ride the in the money call naked back up to overbought, where I'd considering rolling back into a covered position. It's a trade the requires rules and patience.
Other traders will keep a watch list of Very Bullish rated stocks held by the ETF and attempt to realize better than the average gains reflected in an ETF stock basket. IYR constituent CBRE is on the verge of breaking out above $80 and carries a Very Bullish rating. The stock is uptrending in both short and long term. Money flow has blipped positive, while relative strength like its parent ETF has been persistently bullish. Earning are on April 29th, and any trader hoping to capture outsized gains has to be prepared for the risk of holding a single company stock through an earnings announcement..
That's where the Chaikin OptionsPlay spread evaluation model can come on handy. It will objectively rate various risk defined long options strategies (among other income strategies as well) such as a long call vertical, where the risk of disaster is mitigated should the company miss earnings expectations and sell off. In this case, the long naked call and long call vertical strategy ratings appear to be sub par. So after consider a number of different ways to play the sweet spot IYR, long stock of the ETF would likely be my preferred way of trend trading my way through earnings seasons.
We have been tracking the Bull, Bear ratio of the $SPY on a daily basis for more than 6 years, going back to January 2014. During the past 30 days or so the ratio of bullish stocks to bearish stocks, as determined by the Chaikin PG, has been steadily carving out new highs. Today, a ratio we were doubtful we'd see, but the overwhelming bullishness in the market has made it so. A bullish or very bullish ratio of 5 to every 1 bearish or very bearish stock. Not only above 5.0, but nearly 6, at 5.68. Truly astonishing. Is this the new normal? Or is this a red flag? In the 6 years of tracking this ratio, we have found that highs in this ratio often proceed sharp corrections. However, this is the first time we've had $6T in stimulus and QE at our backs. We will be watching the ratio and the Chaikin oscillator closely for any indications of what's to come.
Our relative strength rules have been leading us out of tech for a number of weeks. The trend continued this morning as our rules mandated we liquidate half of our remaining positions in $XSW ( software & services) and $XITK ( innovative tech) The trigger was a break down of 3 month relative strength versus our benchmark, the $ACWI.
Our forced liquidations opened up some cap space which allowed us to start a fe new positions in energy and financials, and add to an existing position relating to financials.
Watch to days video to see how we use Chaikin Analytics alongside our own rules to manage our paper ETF portfolio.