The Holy Grail In Weak Markets
Profiting in a weak or choppy market.
Weak or choppy markets can be difficult to navigate.
In strong environments it’s easy to participate. Clean trends, easy breakouts, buyable pullbacks, low volatility, and little to no news flow.
Pretty straightforward.
When the environment changes and volatility picks up with headlines coming out every hour, it becomes much more important to be selective. This is where most market participants start to struggle.
Why? Setups that used to work begin to fail, momentum fades quicker, breakouts reverse, pullbacks don’t hold key levels, etc.
What’s key in an environment like this is not focusing solely on what’s going lower, but what isn’t going lower?
Underneath the surface of a weak or choppy market there are typically a handful of names doing something different. While the indices are getting weaker and selling off, some stocks buck that trend and get stronger. This is one of the clearest signals the market can give you. It’s called relative strength.
Relative strength in an individual stock is when the general market environment is poor and trending down but certain stocks refuse to go lower, and in some cases go higher. These are the names institutions and even smart retail investors are accumulating.
If a stock is acting strong in a weak market, what will it do in a stronger market? It doesn’t take much imagination to figure that out.
Weak markets in many ways are a filtering mechanism.
Stocks that hold up best or bottom early in a weak market often lead when the environment changes. The stocks that act weakest are likely going to lag when the market eventually flips bullish again.
If you pay attention, weak markets are where future leaders begin to separate themselves from the rest of the market. When all stocks are under pressure, the stocks that hang in are the ones to focus on.
It’s important to emphasize that the goal during these periods isn’t to be overly aggressive or to force trades in leaders just to stay active. Smaller size, less trading is how I approach these environments. But I do observe closely.
I study which names are holding up, which are acting constructively, which sectors and themes act well, and which groups are weakest.
When the market eventually stabilizes and conditions improve, leadership won’t just randomly appear out of nowhere. It’s already there, but the biggest gains come when that leadership is identified before the turn, not after.
In the remainder of this article I’m going to discuss how you can identify relative strength, the scanners I use, how you can act on strong stocks in a weak market, which stocks are displaying major relative strength in this current market, and what it means going forward.