Last week in my market update I shared with you one a chart of one of the strongest stocks I’ve seen in a long time – Pepsico (NYSE:PEP). This week I’m going to share with you how to find strong trending stocks like PEP all by yourself.
The tools I’ll be using are available in TradeStops Pro but even if you’re not a TradeStops Pro subscriber, you’ll get a good idea of how to go about looking for strong stocks in strong sectors.
As you probably know by now, I’ve combined all of my best research and proprietary indicators into a single suite of technical indicators that I call the Stock State Indicator or SSI. The SSI is a full-cycle set of indicators that can give you an idea of both when to buy and when to sell any stock or index.
The SSI currently consists of three primary states. Any given stock or index is always in one of these three states as indicated by the following colored hand gestures:
The yellow caution hand indicates that the stock or index has corrected beyond its normal expected volatility range as indicated by the TradeStops Volatility Quotient or VQ. The VQ is a percentage that tells you how much you should expect the stock to move in a year or more just due to volatility. When a stock corrects from a recent high more than VQ, the Smart Trailing Stop will trigger and the SSI will change to the yellow caution hand.
The green thumbs up indicates that sometime in the recent past the stock or index triggered a Re-Entry Rule. The Re-Entry Rule is a proprietary indicator that tells us when it’s safe to get back into a stock that was previously stopped out. The Re-Entry Rule tells us that the stock has had a strong bounce off of a bottom AND that it is starting an uptrend. When those two conditions are met, the SSI changes from the yellow caution hand to the green thumbs up and we say that the stock has a “active SSI”.
The third primary state of the SSI is called the Low Risk Zone. A stock or index can only be in the Low Risk Zone if it has an active SSI. For stocks that do have an active SSI, the Low Risk Zone indicator tells us that a stock has pulled back from a high just enough to be interesting but it hasn’t pulled back so much as to be in danger of a big decline. The stock or index is “close” to its Smart Trailing Stop but it hasn’t yet penetrated the Smart Trailing Stop.
So now we’ll use our three primary SSI states to take a look at what’s currently going on in the stock broad stock market, various stock market sectors and some individual equities.
The SSI is showing the yellow caution hand, indicating that SPX was stopped out by its Smart Trailing Stop and has not yet triggered a Re-Entry Rule. The VQ on SPX is 10.8%.
The broad stock market is flying the caution flag. It’s a time to be careful and extra attentive to our portfolios.
The broad stock market, however, is made up of a number of different sectors. We can use the Select Sector SPDR set of ETFs to get a more detailed view of what’s going on within the S&P 500. This family of ETFs groups the component stocks of the S&P 500 into 9 different market sectors. Each sector has its own ETF.
Out of all 9 sectors, the only one that has the green thumbs up SSI indicator is XLP which represents the Consumer Staples sector of the S&P 500. Looking at a 6 month chart of XLP in TradeStops we can see several things as identified by the numbers below:
- By mid-October 2015, XLP had bounced strongly off its August bottom and triggered new Smart Trailing Stop coverage on Oct 19, 2015.
- The Smart Moving Average confirmed the bounce and a Re-Entry Rule was triggered shortly thereafter on October 26, 2015. This Re-Entry Rule officially changed the SSI from yellow caution hand to green thumbs up.
- XLP has dipped into its Low Risk Zone a couple of times since its new Re-Entry signal.
- The most recent high in XLP is $51.24 which occurred on Dec 29, 2015.
So summing up … XLP recently triggered a Re-Entry Rule, has dipped into its Low Risk Zone several times now with strong support from its Smart Moving Average and looks to be on the verge of possibly breaking to new highs again.
That’s a strong performance, particularly in light of the turmoil that’s been engulfing the stock market over this same period of time.
If you’re comfortable owning an entire stock market sector you might consider buying XLP itself. Or you could drill down even further and review the individual component stocks that make up XLP.
You can find the top 10 component stocks of XLP in the Holdings section of the ETF sponsors website. Here’s how they currently look in TradeStops:
We can see that about half of them have active SSI’s as indicated by the green thumbs up. Flipping through charts of these five stocks shows me that PEP is the strongest of the bunch. It has the longest sustained bull run of all of them. It’s last Re-Entry Rule was triggered on October 23, 2009 and it hasn’t been stopped out since.
Here’s the chart that I shared with you this past Friday:
Pepsico is a super-strong stock in a questionable market.
Buying stocks on strength doesn’t come naturally to most of us. In fact I spent the first decade of my investing life attracted to stocks that had fallen sharply in price. Not anymore. I’m convinced that limiting my universe of investment choices to those investments with a proven track record of success is the way to go.
Investing is, of course, a deeply personal endeavor. You have to decide what you’re most comfortable with and keep your focus there.
Whatever your particular focus is, the tools of TradeStops can help you find your way.
Richard M. Smith, PhD