Our view remains that this is a new bull market in stocks, so we want to continue using any weakness towards 10,000 in the Nifty 50 to be adding exposure. With that said, just as we would pull the weeds out of our garden periodically to keep it healthy, we want to do the same with our portfolios.
And what better time to review your portfolio than at the end of the quarter?
In this post, we’re going to show a few examples of stocks that remain out of favor…and their characteristics, so that you can identify any of the weeds in your portfolio and determine the best course of action for them.
After a 44% rally off the March lows, it’s not hard to identify which stocks are still stuck below former support or have not rallied all that much. If your stock isn’t participating in a broad-market rally, then that may be the market telling you there’s an issue with that name. If they didn’t participate in the upside, that relative weakness tells us they’ll likely lead the way lower during any corrections in the broader market.
Our first example of a weak stock is Coal India Ltd. In this case, we’re looking at a name that didn’t participate in the rally at all.
Instead, prices have gone absolutely nowhere since their March lows and are consolidating in what looks like a classic continuation pattern. Any weakness or pause in Equities as an asset class and we’d expect this to be breaking down to new lows.
Click on chart to enlarge view.
The second type of stock is a name like JSW Steel Ltd., which actually outperformed the nifty 50 since the March lows, but is still stuck below former support/resistance. Well, if the stock is still in a downtrend we don’t care how much it went up. The risk is still to the downside.
Notice how despite prices rallying 56%, the stock couldn’t get back above former support at 209 and momentum failed to get overbought. Could it consolidate sideways and eventually break out? Sure, but that’s the lower-probability outcome in our opinion given the relative weakness of the entire sector/industry group. We’ll let it be someone else’s problem until that happens. For now, we want to be avoiding it.
The third type of stock is one which was trending higher but is now breaking to the downside. Here’s IGL, which was in a long-term uptrend, but failed to break out with the broader market.
Instead, prices consolidated sideways for three months and are now breaking down instead of out! Momentum is in a bearish range and prices are back below their 200-day moving average, suggesting sellers have taken control and increased volatility/downside is likely ahead. We cannot own stocks with these characteristics.
There are not a ton of stocks out there below their March lows, but the last type would be any stocks that are still at or below their March lows. Those are probably not stocks we want to be owning if they’re continuing to fall during a 44% rally in the major indexes.
To conclude, a bull market in stocks does not excuse poor risk and portfolio management. Despite generally rising prices in Equities, there are still plenty of stocks that are not participating to the upside to the same degree as the average or above-average stock. We still want to focus on owning the names showing strength and positive momentum characteristics on an absolute and relative basis.
Thankfully, many of the stocks we’ve been buying have worked very well.
With that said, we’ll be reviewing those and discussing the themes we want to take advantage of over the next three months in the Quarterly Playbook we’ll be releasing for members in the next day or two.
Thanks as always for reading. And as you’re doing your portfolio review, if you want our opinion on any names you can contact us here and we’ll get back to you as soon as we can.