Identifying The Next Relative Strength Leaders

by Dana Lyons

Stocks that were the quickest to recover from correction losses may be new relative strength leaders going forward.

If you read our piece yesterday, “Are Stocks Out Of The Woods?“, you know that, despite the big rally, we don’t believe the stock market is in the clear just yet following its October swoon. That said, it is not too early to begin looking for potential relative strength leaders in the next rally. One thing to look for in attempting to identify future relative strength leaders is…current relative strength. In other words, look for areas of the market that are performing well now – especially in terms of how well they have recovered their correction losses thus far.

From an international perspective, we posted a chart yesterday on Twitter highlighting the first global market to return to new highs, post-correction: the Brazilian Bovespa.

Yes, the action in the Brazilian market has been influenced of late by political events. Therefore, we must take the strength with a bit of a grain of salt. That said, the market is back to new highs and far outpacing the recovery efforts elsewhere around the globe. Therefore, while the Bovespa may not be off to the races just yet, it is certainly a relative strength candidate following some consolidation.

What about in the U.S.? We will reiterate – look for areas that have rapidly recovered back to or near pre-election highs. That should be a good place to start looking for relative strength leaders in the next durable intermediate-term rally. One specific sector in which to look for candidates might be health care.