3 Relative-Strength Leaders to Buy on the Dip

by Chris Johnson | April 25, 2012 11:35 am

With the market having pulled back almost 5% from its April 2 highs, investors are looking at the recent weakness as a pause that refreshes as stocks appear to be revving up for a run back to their highs. With earnings besting analysts’ recommendations and some technical support beginning to show signs of building, now may be the time to start taking new positions to benefit from a potential run back to the S&P 500 Index’ recent s highs, just over 1,420.

With that in mind, we thought it was time to look at some relative-strength leaders in the S&P 500 Index. The table below displays the top 20 S&P 500 relative-strength-leading companies, based on their respective three-month performance compared to the S&P 500 Index (a/k/a relative strength).

Relative strength outperformers[1]

On its own, this list is typically a good place to start when looking for bullish trades, but for the purposes of leveraging the rally, there are a few other criteria we like to use to find companies with a little more potential to slingshot higher. For this, we filter the relative strength list to find companies that are currently trading just above (within one percent) their 50-day moving average and with a 20-day moving average that is above their 50-day moving average, one sign of a positive technical trend.

This filters the relative-strength leaders down to companies that are poised to benefit from a bounce off their 50-day, usually a nice boost for a short-term rally.

Analysis of relative-strength outperformers[2]

From the list, there are three that stand out as good candidates for leveraging into the market rally….

Priceline .com Inc (NASDAQ:PCLN[3]): Travelrelated company Priceline.com continues to benefit from a strong technical pattern as the stock is one of those few that has been driving to new all-time highs on a monthly basis through 2012. The latest pullback in the market knocked the stock down to its 50-day moving average (the stock tested this trendline yesterday).

The successful test of the 50-day should serve as a “buy signal” for this high-flyer as the technical traders will start increasing their holdings in this relative-strength leader. No one likes buying a $700 stock, so this is a situation where options will offer an opportunity to leverage a move and participate in a move with less capital. The June 750 calls are currently trading under $24 and offer an attractive method for positioning for a run back to $750 and higher.
Daily chart of Visa (V)
Click to Enlarge

Visa Inc (NYSE: V[4]): Visa has spent the last two months consolidating at $120 and appears ready to break through to new highs. The consumer-related company will benefit from any improvements in the economy as consumer’s charge back into their buying habits. The stock’s rising 50-day moving average should help usher Visa higher, allowing the stock to break above the $122 level.

Capture the move, and then some, with the June 120 calls. These at-the-money options are trading for just over $4 and provide leverage for a portfolio when the stock takes out its recent highs.

Limited Inc (NYSE: LTD[5]): Historically, the retail sector and its component companies lead the market higher during economic recoveries.  The outperformance is driven by the return of consumer activities after a period of rest. We’ve seen the Retail ETF (NYSE: XRT[6]) emerge as a great leader for the last six months, driven by performance of companies like Limited Inc.

Limited shares just bounced off of the $48 level as they’ve spent the last month consolidating above the 50-day moving average. We expect the shares to break back to the $50 level and higher in the near-term future. Investors can leverage a move above $50 with the June 49 calls, currently trading around $1.85 per contract.

  1. [Image]: http://investorplace.com/wp-content/uploads/2012/04/Screen-Shot-2012-04-25-at-10.05.30-AM.png
  2. [Image]: http://investorplace.com/wp-content/uploads/2012/04/Screen-Shot-2012-04-25-at-10.18.46-AM.png
  3. PCLN: http://studio-5.financialcontent.com/investplace/quote?Symbol=PCLN
  4. V: http://studio-5.financialcontent.com/investplace/quote?Symbol=v
  5. LTD: http://studio-5.financialcontent.com/investplace/quote?Symbol=ltd
  6. XRT: http://studio-5.financialcontent.com/investplace/quote?Symbol=xrt

Source URL: http://investorplace.com/2012/04/3-relative-strength-leaders-to-buy-on-the-dip/
Short URL: http://invstplc.com/1ftWXHN