Scanning For Strength In Selloffs

considering the pressure on the sector of late, and the swift rotation out of the space and into other areas of the market, if we're going to look for opportunities in tech, we need to be more selective these days.

While the recent selloff and new leadership regime suggests there are likely to be less bullish setups in tech than we're used to, it doesn't mean there won't still be plenty of outperformers coming out of the space... It just means we have to look a little harder to find them.

I'm going to take you step-by-step through my process to find those tech stocks that recently bucked the trend and carried on to new highs even as the index suffered a 10% drawdown from its February peak.

     1. For purposes of this exercise, we'll keep it simple and narrow our universe to only Large-Cap Tech stocks.

There have been plenty more opportunities in SMIDs than their big-cap peers since last year.

This is illustrated by the staggering divergence in performance over the past 6.5 months as the S&P Small-Cap 600 $IJR and Small-Cap Tech $PSCT have outpaced the Nasdaq 100 $QQQ and Large-Cap Tech $XLK by 50%!

While this surge in outperformance is undoubtedly a bullish long-term development for smalls, both the relative and absolute trends are extended and signaling near-term caution.

We think it's likely that Large-Caps put things back in gear and start to reassert that old leadership in the coming weeks. Although, considering the recent damage to the relative trend, we have little reason to believe this will be anything more than a counter-trend move.

Again, just because this is our outlook at the index and sector level doesn't mean that there won't still be some serious winners coming out of the space. The fact that the sector just experienced some selling pressure simply makes those future leaders stick out more, hence why this is an ideal time to do this exercise.

We really only needed two filters to identify these names.

     2. The first filter is the performance since XLK peaked on February 12th.

This will allow us to isolate those stocks that were most resilient during the recent corrective action at the sector level.

The idea here is simple... I'm sure some of you have heard the analogy about it being like a beachball held underwater.

The names that are still moving higher, or at least outperforming during periods when the market or their peer group is under pressure tend be the same ones that lead once the volatility or selling pressure subsides.

     3. The second filter is the stocks' proximity to all-time highs.

This may seem simple, and it is. But it accomplishes a critical function in eliminating those names that are in primary downtrends and may just be experiencing dead-cat bounces. Those are not the stocks we're looking for.

We want stocks that are already secular leaders and in structural uptrends. There's really no better way to isolate stocks in uptrends* than by focusing only on those that are at or near new all-time highs.

* some other filters we commonly use to isolate stocks in primary uptrends are by eliminating those that are beneath their 2018 highs or in bearish momentum regimes.

Here is a bubble chart showing all of the XLK components with our two criteria on the axes. The proximity to all-time highs is measured by the y-axis while each stocks' change since February 12th is plotted along the x-axis.

Based on these metrics, we want stocks that are in the upper right of this chart. Those at the top are at or near all-time highs, while those toward the right have been the best performers over the past month or so. We want to bet on stocks that check both of these boxes.

Let's take a look at a handful of the best setups now and outline trade ideas in these former, and potential future leaders*.

* We've circled the names we discuss in black in the bubble chart above. 

First up is Visa $V. As we've pointed out on the chart, this one is most definitely in a primary uptrend, and it's also showing near-term leadership as evidenced by the new highs.

As long as we're above 214 we want to own Visa with a 1-3 month target at 264.

Next, we have Accenture $ACN which provides management, consulting, and IT support services for businesses. Doesn't quite sound like a tech stock, but according to the S&P, it is. We could really care less about these classifications.

What we do care about is buying stocks that are showing strength and making new highs. ACN is another one that fits this bill.

We're buyers above 265 with a 2-4 month target of 344.

Here is the consumer-oriented FinTech stock Fiserv $FISV. The company provides integrated information and e-commerce systems and support for its clients, many of which are in the Financial Services industry.

Notice the resilience in momentum as the stock refused to hit overbought when it corrected earlier in the year. Fast forward to today, and FISV is right back at all-time highs and registering another overbought reading to support a potential breakout of this 12-month base.

We're buyers on strength above 125 if and when we get it with a target at 157 over the next 1-3 months.

Like Visa, here's another tech stock from the payment processing space, Global Payments $GPN. Again, this one seems to be walking a fine line between Financials and Technology... Are you noticing a theme yet?

This one is already breaking out. If we're above 209 we're long GPN with a 1-3 month target of 274.

Now, this next name is a real blast from the past. Here is HP Inc $HPQ, which was one of the secular leaders from the last century...  but not so much the current one.

After making absolutely no progress for more than two decades as price consolidated in a massive base, investors are finally back in the green on this one as the stock is just pennies away from reclaiming its dot-com bubble highs.

We're buying this old PC maker above 30.50 with a 3-6 month timeframe and target of 46.50.

And what goes in all computers? Hard drives, right? Or for all you computer nerds, I believe SSD's are the new tech. Well, this next stock Seagate Technology $STX manufactures all of that unsexy computer hardware.

You can see the relative strength acceletating higher since last year in the lower pane of the chart. As long as we're above 69.50 we want to own STX with a 3-6 month target of just over 100.

Let's discuss the theme in all these stocks we just covered quickly.

Notice how we didn't discuss any of those hot new software and internet names that have been leaders for the past several years?

In fact, it's the complete opposite. It's all old tech! PC and RAM manufacturers like Seagate Technologies and HP Inc were left for dead by investors decades ago! Wall Street still has more holds and sells than buys on both of these stocks.

Now these hated names are the leaders... and boy do we love that kind of sentiment at our backs.

Then we have business support, payment processing, and credit services... basically, I'm seeing a lot of FinTech in here. This shouldn't be a surprise considering the absolute strength from Financials as well as the aggressive rotation into this area in recent months. Seeing these names show up in our tech scan is simply further confirmation of that trend.

The real takeaway is that making these scans an ordinary part of your process won't just allow you to identify leaders, but will also provide incredible insights and information about markets along the way.

You always want to build your scan in a way that fits with your overall objective, and its parameters should vary based on the overall market environment.

And it's not hard at all. Follow a few simple steps like the ones I laid out in this post and, voilà.

I hope this exercise was helpful and that you can incorporate some of the things we just discussed into your own process.

Shoot me an email at Strazza@allstarcharts.com with any questions.

Allstarcharts Team