[Table Of The Week] Opportunities For An Uncertain Environment

Steve Strazza
April 9, 2020

From the desk of Steve Strazza @Sstrazza

If you read our research regularly you may be sick of this by now, so my apologies. But there is a method to our madness. A tried and true repeatable process that allows us to consistently identify the strongest and weakest areas of the market. Any market. While we've focused mainly on US Equities recently, we can apply these same principles to any asset class.

We have continually highlighted the fact that the long-term outperformers are often also the short-term leaders. Why? Because there is empirical evidence to support this and we know it works. I'll be writing an educational post about this soon.

We've also written a lot lately about how one of the main signals we're looking for before turning bullish on stocks is for the percent of NYSE components to break back above 15%. Well, we're still not really close, but with such drastic daily swings in the major indexes, this could change fast so we want to be ready if and when it does.

We focus on the S&P 500 because it is our view that the strongest area of global equity markets remains Large-Cap US stocks. As of April 7th, about 12% or 60 of the S&P 500 components were trading above their 200-day simple moving average. The table below includes just over half of those names.

Click on table to enlarge view.

With breadth as weak as it is, this is not the ideal environment to be looking for long opportunities. But, there is always a bull market somewhere, so let's take a look at those few names that actually are trading above their 200-day moving average because these are the same names we'll be looking at to generate alpha once we're comfortable that the market has stabilized.

With that as our backdrop, here is how we drilled down to the stocks included in the table above:

  1. Must be in a bullish momentum regime. Period. You know how important this is to us.
  2. Price must be above the 200-day moving average.
  3. The slope of the moving average must be moving higher.

These three filters ensure that everything on our list is a long-term outperformer. Then we look at other metrics that highlight near-term performance, one of which we've included and sorted the table by, the percentage change from the March 2020 low.

Since this table is truncated to include only secular leaders and many columns were excluded for the sake of simplicity, here are some summary statistics of these stocks relative to the entire S&P 500 in order to put their strength in perspective.

  • Roughly 9% of S&P 500 stocks are in a bullish momentum regime and 12% are above their 200-day moving average. But our list includes only those that are in both a bullish regime and above an upwards sloping 200-day moving average, of which there is only about 6%, which are the 32 stocks in the table above.
  • The average stock in the S&P is 35% below its 200-day moving average. The average stock on our list is more than 10% above it.
  • The median stock in the S&P hit oversold 11 days ago which was when the major averages bottomed on March 23rd. Meanwhile, the median stock in our table has not been oversold for 238 trading days or almost one year.
  • The average S&P stock is currently in a 33% drawdown. The average stock on our list has endured about 1/3rd of the damage with an average drawdown of less than 12%.
  • The average S&P stock is currently 25% below its 2018 high while the average stock on our list is roughly 13% above its 2018 high.

I can keep going, but the point is clear. These are the leaders and this are where we will continue to focus for long opportunities. We have already recommended 14 of these 32 stocks over the past month or so and we still like these setups. Refer to our Trade Ideas page for details.

We were stopped out of many immediately due to the volatile price action, but others achieved their price targets in a matter of days. Keeping losses small is imperative, so we're happy to exit those losing trades, but many of the setups still look attractive so it's important to remember there is absolutely nothing wrong with re-entering positions when risk management levels permit doing so.

If you want to know which of these stocks are currently offering the best reward/risk setups, Premium members can read our post with new trade ideas here.

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Allstarcharts Team

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