Investing Strategies: How To Find Top Stocks In A Weak Market


Hi everyone and welcome to Investing
Strategies it’s Alissa Coram with Investor’s Business Daily from the
Nasdaq market site in Times Square today we’re dissecting the stock market’s
direction as trade more headlines spark heavy selling where do we go from here
the chief investment strategist of William O’Neil and company is here to
weigh in and we’ll also break down two top stocks on his radar
and speaking of top stocks how exactly are investors supposed to filter out the
noise and find the best names before they make big moves well
we’re analyzing one of this year’s biggest winners to walk you through IBD’s recipe for success plus we’re sitting down with the head of research
at Nasdaq Dorsey Wright to learn more about how they’re using relative
strength to find stocks on a hot streak Investing Strategies starts now alright now before we get started today
just a brief word about our new show our mission here is to help you make smarter
decisions with your money by providing actionable insights that includes
analysis of current market conditions using IBD’s proven market timing
strategies to determine whether you should stay in or get out of the market
we’ll also be discussing trade ideas with a focus on stand out stocks from
top sectors that have the greatest potential to continue moving higher and
timely case studies will be used to explain timeless tactics for buying and
selling Plus you’ll hear from investing experts
industry thought leaders executives of training companies and more all to give
you an edge with your investments so let’s kick things off with some market
insights joining me today for our discussion is Randy Watts chief
investment strategist at William O’Neil & Company an affiliate of investor’s
business daily thanks so much for joining us today Randy thanks for having
me on Ali all right so with the sell-off intensifying here what is your outlook
on where we might be headed in the near term so I would say if we first start
with the technicals the technical picture of the market has really changed
very dramatically in the last two weeks if if we go back to last week you know
we started the week with with over 70% of stocks in the S&P 500 both above both
their 50-day moving average and their 200-day moving average as we enter today
those numbers have fallen to only 47 percent above their 50-day and only 64%
above their 200 days so the markets on an individual stock basis really
narrowed that’s actually occurred in the sector area as well at William O’Neil we
defined the market as 11 sectors right now nine of those are trading below
their 50-day moving average and only two are above and the two that are above our
defensive sectors utilities and consumer staples so the character in tone of the
market has really changed over the last week to get much more negative right and
with this tonal shift it’s not really the right time to be buying stocks would
you say IBD’s methodology so you don’t want to be buying stocks when you’re in
a in a correction type and because we don’t know when the bleeding
will stop we don’t and you know we really like to take ours you said our
direction from the market we think now is the time to actually be reducing risk
you know clearly the market is much weaker than it was and I think what’s
driving that is a couple of things the first is the US economy this year has
really been driven by consumer spending consumers about two-thirds of the
economy and consumer spending has held up pretty well this year as we saw in
the second quarter GDP numbers business spending though is another matter I
think what’s going on there is that people in you know corporate executives
are worried about making a capital allocation mistake and they’re not sure
how to allocate capital right now given what’s going on on the trade front so
for example if you were to build a new factory where do you build it you don’t
want to build it somewhere where there’s going to be a tariff issue so business
spending is actually down year-to-year right now in terms of the escalation of
the trade war between the US and China both last week and today Monday I think
that is causing the market to have some fears that business spending is not
going to rebound this year and as a result I think the question for
investors is how long can the US consumer really carry us economic growth
right and also factoring into the conditions we’re seeing is interest rate
so how how would you say that that’s impacting the environment here as well
given the the big shift in the ten year that we’ve seen Lee sure there as you
said there’s been a huge move in interest rates over the last the last
week and a half if you go back a week or so ago the US
10-year yield was above 2% as we came on set today it’s now down to about 1.75 in
terms of yield that’s a very very big move for interest rates if you look at
the 10-year yield versus the three-month yield right now that curve is inverted
and it’s inverted now now by about 26 basis points which is pretty substantial
historically an inversion of ten-year yields versus 3-month yields leads to a
slowing in the economy over the next 12 months
so clearly bond investors as opposed to stock investors are really expecting
much worse economic growth over the next year and
an addition if you look at what’s going on with with bond investing as well
people are now forecasting another rate cut in September for the Fed so even
though Powell in his news conference a week ago was what was a little bit more
more neutral than people thought bond investors think that there’s many more
rate cuts to come right and speaking of the Fed I feel like one of the themes
this year is just the headline driven nature of the market really impacting
where we could go so if we do happen to see some positive headlines and had
higher from here touching on the technicals from that perspective could
we perhaps see a little resistance or what would make you feel more confident
about increasing your exposure so I would say a couple of things the first
is if you look at what the markets done if you lose the S&P as a proxy for the
market and you look at what the markets done over the last year we entered last
August with the S&P around 2813 you know as we came on came on this morning
right now the markets around 2860 so the market hasn’t really done very much
over the last year even though it’s been a pretty volatile ride I think in terms
of feeling better about things we’d really want to see three things first we
would like to see continued easing by the Fed second we would like to see some
resolution on some of these trade issues so we know what businesses are what
rules businesses are operating under and third and and very important for us
because you know at William O’Neil we believe stocks follow earnings earnings
estimates have been coming down dramatically for the second half of this
year and I think to feel better about the market we would want to see earnings
estimates for the SP stabilize or start to move higher when we entered this
earnings season estimates for the third quarter were for earnings to be up
roughly one to two percent they’re now actually forecasted to be down the
fourth quarter was estimated to be up about six to seven percent it’s now
forecasted to be up only four so as we’ve moved through the year as we’ve
moved through the year earnings estimates have continued to ratchet down
on a forward basis and we really want to see that stopped
to get a little bit more bullish on stocks all right well with that backdrop
in mind let’s now pivot to this week’s stocks to watch starting with Marvell
technologies now given the trade war tensions the semiconductor sector does
have a lot of exposure to China so I think this is one great example of
something that investors need to be aware of when they are looking to invest
in in different sectors given this whole backdrop drop of the China trade war
right now absolutely and I think our focus is not on semiconductors that are
selling into just the general economy and our economically sensitive right
we’re really looking for names that have something specific and thematic going on
with their business and Marvell which is a fabless semiconductor company that
really concentrates on networking and communications they’re making chips for
5g which is the the next generation cellular infrastructure and they’re one
of the leaders there they they’ve got agreements with Nokia ericsson and
importantly samsung and the 5g rollout is really just starting right now around
the world it’s estimated that over the next five years spending on 5g is going
to grow 30% a year importantly for Marvell on the 5g equipment they get
four times the dollar content in 5g than they got in 4G so we think there’s a
secular story for this company where the 5g role that happens around the world
really regardless of the short-term fluctuations in the economy and that’s
set to have a huge impact on their earnings especially next year so when
you talk about the importance of strong earnings and stocks following earnings
you know we could see potentially a lot of upside here for this stock you know
if some of this downward pressure from the from the trade war perhaps subsides
a bit absolutely the stocks turning around $25 today the estimates for next
year around a dollar 30 so on a price earnings basis it’s not a particularly
expensive stock and we think those earnings can come through the stock you
move appreciably higher over the next year all right great and now let’s talk
about twitter holding up pretty nicely here given the down dress
left and the story here on the fundamental side is this increasing user
growth so why do you have your eye on Twitter here so so a couple of things
first we love the technical pattern it’s got a nice cup with handle which as our
viewers know isn’t historically a very good technical pattern for price
appreciation second one of the things that’s happened at Twitter let’s
important is that as you mentioned users have turned around user growth was
decelerating in q1 it turned around and started to re-accelerate it accelerated
again in q2 if you look at their daily average users it’s gone from one one
hundred and twenty two million last year to one hundred and thirty nine million
now and also they’re expanding into video content which we think is a very
exciting space they’ve signed an agreement with Comcast to do live
broadcasting of the Olympics they’ve also got new deals with ESPN and with
Viacom so we think the increase of video content on Twitter is going to lead to
much more user engagement and really port ends well for the company over the
next year right so it sounds like the fundamental story is there the the chart
is holding up nicely as you mentioned but with this backdrop of market
uncertainty wouldn’t be advised to be aggressively
buying shares here what it we’d really like to see the market start to
stabilize the market is moving through its 50-day moving average on both the SP
and the Nasdaq we think the next reasonable level of support for both
averages is the 200-day moving average that’s about three percent down from
where we’re trading so we’d really like to see the market start to stabilize
before we want to put a lot of new capital in again you’ve had a big move
in the market you’ve had a big narrowing in the number of names participating and
you’ve had some negative action in the bond market in terms of predicting the
economy so we think investors should let some of this settle before getting more
aggressive on buying stocks well thanks so much for those insights especially
important now that we are seeing this tonal shift thanks so much absolutely
all right and coming up next we’ll be talking technicals and taking
look at the chart of one of this year’s top road stocks I’m gonna walk you
through three key factors you should analyze when you’re looking for top
stocks back in a minute this season on cultural capital we are
in New York City and San Francisco come with me as I tour some of the world’s
most innovative companies from Squarespace to c3a I give II and figma
learn how CEOs built in controlling companies while maintaining the ultimate
office culture on season three of cultural capital on the brand-new Nasdaq
calm all right so when you’re looking for the
best stocks to buy you need a set of criteria to narrow down your search from
the thousands of stocks that are out there that’s why IBD’s investing
methodology focuses on three key pillars to find winning stocks before they make
their big moves now those pillars are fundamentals
technicals and market conditions so first we scan the market for stocks with
top-notch fundamentals I badies research shows that strong earnings growth is one
of the most important factors to consider when you’re buying stocks now
you ideally want to look for companies with earnings growth of at least 25
percent or more in the most recent quarter and it’s even better when that
growth has shown acceleration and strong sales growth is also key then we timer
buys using technicals now that includes price and volume action as well as a
relative strength before you buy a stock you want to make sure it’s already
headed in the right direction and that’s up we look for stocks to clear prior
resistance levels and break out of what we call chart patterns which are the
launching pads that kick off virtually all major stock moves you also want to
check the volume when analyzing any changes in share price that’ll help you
figure out if institutional investors are aggressively buying or selling a
stock when you see strong volume as a stock blast higher that’s bullish it’s
also important to by leading stocks that are outperforming the market an IBD’s
relative strength line measures price performance versus the S&P 500 and when
that line hits a new high as the stock breaks out that’s a confirming technical
indicator now the third pillar is market timing even the best stocks will have a
hard time moving meaningfully higher when the stock market is heading south
so having a market uptrend on your side when you’re buying is crucial but if the
market is in a correction that’s not the time to stop paying attention that’s
when you should be looking for stocks that are holding up and outperforming
the market which goes back to that point about relative strength those are going
to be the stocks that are ready to blast higher when there’s a new market uptrend
okay so now that you have an overview of these three key investing pillars it’s
time to take a look at an example cyber-ark software it’s been one of this
year’s top growth stocks with shares almost doubling so far in 2019 so
let’s talk about wide now first cyber arc has great fundamentals earnings
growth has been between 71 and 117 percent over the last four quarters and
the cybersecurity company’s sales growth has been above 30 percent over the same
timeframe now during the market sell-off of 2018 cyber-ark stock was showing
incredible strength as it built a base now when the market was still going down
as you can see here cyber relative strength flying that’s the blue line on
our charts was moving higher now when a stocks relative strength line is making
new highs while the market is making new lows
that’s a bullish signal and this is how IBD’s investing methodology gives
investors an edge to find winners during weak markets so savvy investors would
have had cyber-ark on their watch lists at this time and
then early January market conditions improved and the stock broke out of a
base as you can see here and it was in heavy volume and it extended its gains
on an estimate beating quarterly earnings report also note how the
relative strength line was hitting new high ground as the stock broke out
confirming cyberarks leadership shares were able to find support at this
10-week line here in red before forming a new base and the stock is breaking
below its 10 week moving average amid broader weakness now even if cyber-ark
was holding within a buy range here you don’t want to buy a stock right before
an earnings report that’s risky because shares gapped down if results or
guidance disappoint but with shares selling off sharply now investors who
have a position in the stock should use a closed below this 10 week line and
heavy volume as their sell signal now we will go into further detail on buying
and selling strategies in later episodes but in general cyber-ark is a great
example of how you can use ib d’s investing trifecta of fundamentals
technical action and stock market conditions to find top stocks ready to
make big moves and when we come back I’ll be speaking with Nasdaq Dorsey
Wright about how they use if strength find winning stocks and how
investors can implement this strategy and their portfolios after the break
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outperforming the market makes a huge difference in your portfolio’s
performance and joining me now to take a deeper look at how Nasdaq Dorsey Wright
uses relative strength to find hot stocks is Jay Gragnani head of research
and client engagement at the firm thanks so much for joining us great to be here
thanks for having me alright so relative strength is something that’s very
important to IBD and Nasdaq Dorsey right as well looking from it from a little
bit of different perspectives but how are you guys really utilizing relative
strength to inform your investing decision so a relative strength very
much is core and cornerstone to what it is that we do at Nasdaq Dorsey Wright
whether it’s identifying individual stocks and finding leadership trends in
the market to ranking asset classes and an understanding of do we want to be
invested in stocks or are there other asset classes that we might want to look
at and relative strengths really for us is nothing more than a ranking system
it’s a means of identifying leadership through market data and looking at the
price movement or price action of securities versus each other and so when
we look at relative strengths we’re really relying on that the price
performance of stocks versus each other so if we want to know how should we buy
stock a or stock B we can take those price of the stocks we multiplied one
price of a stock divided by another multiply that number by 100 just to move
the decimal place over and then we plot that reading on to a point and figure
relative strength chart and that’s really what we look at it’s not so much
the number the resulting number but it’s how that point and figure chart
reacts to that movement into that data in the market place right and you’re
really letting the drive your decision so tell me a little
bit more about the thought process of the point and figure chart and for our
viewers who if that’s a new concept to them what what should they know when
they’re looking at one soso point figure is a form of technical
analysis that goes back to the late 1800s so it’s nothing that we created
but it’s something that of the founding of our firm Tom Dorsey and Watson Wright
gravitated to this methodology as a logical organized way to uncover the
imbalances between supply and demand and it’s very much that every single stock
in our system it’s either on a point and figure by signal or it’s on a point and
figure sell signal there’s no in between and so when you’re looking at to
evaluate a stock we want to buy stocks that are being controlled by demand it’s
the basic econ 101 right if there’s more buyers particularly good than our
sellers prices have to rise if there’s more sellers particularly good than
there are buyers prices have to fall and if buying and selling pressure equal the
prices have to remain the same and the point in figure methodology is nothing
more than a way for us to uncover those imbalances between supply and demand and
so when you look at a point & figure charts it might look different than
other charts it just simply consists of X’s and O’s where X’s represent that the
price of a stock is rising and O’s represent that the price of a stock is
falling and those two columns are gonna alternate over time if you see a point
on a chart where a column of X’s exceeds the previous column of X’s that’s what
we would call a buy signal that suggests the stock is being controlled by demand
the other side of that if you see a column of O’s that exceeds or falls one
box below the previous column of O’s that’s what we would consider to be a
sell signal those are the stocks we want to avoid those are the stocks that are
being controlled by supply and so when we think about it in terms of relative
strength when we’re comparing one stock to another we’re looking for the same
buy and sell signals and so I can very clearly identify if stock a is on a buy
signal versus stock B or vice versa again it’s it’s either buy or sell sell
there’s no in between and I think that’s one of the benefits
of the methodology whether you’re looking at just the prices of stocks or
whether you’re looking at it through a relative strength lens is it’s it’s very
much black-and-white there’s no gray area there’s no in-between there it’s
either on a buy signal be controlled by demand or it’s on a sell signal being
controlled by supply okay so what do you say to those on Wall
Street who are telling people to you know buy low buy when a when a stock is
on sale because our methodology at IBD we want to be looking for strength and
stocks that are already in an uptrend so what is your take on the whole buy
low sell high mantra well you look at relative strength and the idea is to buy
this the strongest stuff right that’s when we’re talking about buying relative
strength or momentum you know you can think about it in that way too there’s
so much data so much academic research so much actual research that’s been done
out there to suggest that buying stocks with the best momentum or relative
strength outperforms the market over time and that’s really what we want to
do you know there’s other very successful investors out there that are
very much value investors and they’re gonna buy and as the stock goes down it
gets to be more better value and as it keeps going down it gets to be a better
value for us it’s really about being disciplined about how we implement our
process in buying stocks that are doing well but having a sell discipline in
place if at some point it falls below a threshold it moves to a sell signal it
hits our stop-loss we need to move to the sidelines and so really when we look
at relative strength and buying the leadership trends in the market that’s
what we’re trying to do but the other side of that and probably the most
important part of that is the other side of the trade right when do you actually
sell that stock or sell that position out of the portfolio to rebalance it
into the stronger areas of the market yeah that’s my question is if you’re
using these buy and sell signals what is your typical holding period is is there
a typical hold well yeah I mean it depends on what type of strategy whether
it’s a shorter term individual stock kind of very aggressive growth strategy
or whether it’s a longer term maybe sector rotation strategy so it’s not so
much really that the holding period there that we’re looking at because
they’re gonna vary across the board if you go back you can look at on our
website you can look at relative strength charts and see how long those
those stocks tend to stay on buy signals and it tends to be a long time you get a
lot of these leadership groups a lot of these leadership trends stay on relative
strength buy signals for for four years in some cases and by
definition in order for a stock to move to a buy signal to be a high relative
strength name in our in our universe it has to endure a period of out
performance off of my bottom so we’re never gonna look to buy something at the
bottom similarly we’re never gonna look to sell it at the absolute top because
in order for a stock to fall and it’s relative strength ranking it has to
endure a period of underperformance before it’s going to get that sell
signal but really what we’re looking to do is capture the meat of that move in
those like I said individual stocks we track ETFs we track mutual funds broad
asset classes as well conceptually though the idea is the same if we can
identify those leadership trends and overweight those in the market while at
the same time under weighting stocks and sectors that are underperforming that’s
a big deal that’s a huge benefit and especially even just this year consider
if you take the top 50 names in the S&P 500 so the top 50 market cap names
there’s over 70% dispersion between the best and worst performing of those names
that’s a lot of potential opportunity to find excess return in the marketplace if
we have a disciplined process to be able to identify those trends and so how can
investors implement this strategy in their portfolios there’s a relative
strength index and actually a lot of a lot of the stocks on that are a lot of
stocks that IBD follows as as well with those growth characteristics that’s
right there’s we have an extensive amount of research and tools on our
website if you go to a Google Nasdaq Dorsey Wright you go to dorseywright.com and you can see what’s out there it’s a subscription-based service
so you can go in take a free trial and and see what types of information is
there there’s also a number of investment products out there there’s
about 30 or so ETFs that track a Dorsey Wright branded strategy some are
individual stock focused some are sector rotation strategies as well as a number
of mutual funds out there in the marketplace as well all of that
information can be found right right on that website though all right thanks so
much for joining us today and sharing these strategies with us thank you so
much for having me appreciate it enjoyed it all right
thank you all for watching we’ll see you right back here next Monday for another
episode of investing strategies

10 Replies to “Investing Strategies: How To Find Top Stocks In A Weak Market”

  1. New trader here, is there anywhere/website on PC where I can get these kinds of charts with these indicators?

  2. I am looking for outside opinions on what dividend stocks I should buy with 5k would love your thoughts !! https://www.youtube.com/watch?v=xkeG5sFJE_g&feature=youtu.be

  3. No accident they zoom out. Just don't even show the guy's face. That dress, camera angles, legs…too distracting.

  4. Check this out if you wanna get started, it’s pretty easy to understand. And once you get yourself started and going it just makes everything much easier https://share.robinhood.com/ethann408

  5. Hand gestures drive me nuts. I love charts and graphics. Your first guest is just brilliant, but, throwing numbers and descriptions about inverted charts is mind numbing without pictures. Imagine a weather report without the map. Why are you doing this for your new show? IBD is not about hand gestures. Just distracting. Your bullet points are excellent also pointing at charts explaining them excellent.

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