It’s been tough going for investors in 2011. Everywhere you turn, there’s a story about a legendary fund manager getting hammered or a rationale for why stocks are getting smacked lower. Year-to-date, the S&P 500 index is essentially flat, but along the way it’s squeezed even bigger profits from both longs and shorts – and as we approach year-end, things aren’t looking terribly auspicious for investors either.
But that’s not exactly the whole story …
On an individual basis, some stocks have performed exceptionally well in 2011. While high correlations are still a problem for investors, a stock that has a high correlation with “the market” can still dramatically outperform it. The question is how you find those stocks beforehand; the answer is relative strength.
Relative strength is one of the best tools we have to identify stocks that are likely to beat the market in 2012. So how does it work?
Put simply, relative strength is a ratio of a stock’s price to a broad market index. The ratio itself isn’t important -- instead, it’s the trend of the ratio over time that’s investible. According to academic research, relative strength is a statistically viable strategy over a one-to-10 month time horizon; that’s the timeframe we’re focusing on today. To find the seven names that made this list, I used a quantitative screen to rank the top S&P 500 names with relative strength over several timeframes, then weeded out the more attractive names using technical analysis.
The result is a set of relative strength trades that should outperform as we enter 2012.
Cobalt International Energy One-Month Relative Strength: 42.66 per cent
Nearest Resistance: $16
Nearest Support: $15
Shares of Cobalt International Energy have been rallying in the last month, buoyed by news that the firm was resuming its drilling program in the Gulf of Mexico, with approval in-hand. All told, this stock has rallied more than 54 per cent in the last month, and there’s reason to believe that shares have further to go.
Even though CIE made a significant move on the drilling news, buying pressure propelled shares above an important resistance level at $15. Since then, shares have been consolidating between $15 and $16, creating a well-defined range for a breakout trade. It makes sense to buy a push above $16 with a tight stop in tow.
Booz Allen Hamilton Holding Corp. 1-Month Relative Strength: 23.62 per cent
Nearest Resistance: $18
Nearest Support: $17
Mid-cap consulting firm Booz Allen Hamilton Holding Corp. (BAH) is another example of a stock that’s shown tremendous relative strength lately, but still has room to move higher. As with CIE, Booz Allen is trading in a tight consolidation range right now -- that could provide traders with a well-defined breakout in 2012.
Booz Allen completed a double bottom pattern earlier this month, breaking about above the $16.50 peak level that had previously constricted shares. Even though this stock is throwing back this week, its minimum measuring objective puts a potential price target around $19 for the double bottom. Wait for a breakout above $18 before taking a position for a quick turnaround in this name.
Gannett Co. 1-Month Relative Strength: 23.02 per cent
Nearest Resistance: $13.50
Nearest Support: $12.50
Even though Gannett Co.’s performance has been stellar over the last quarter, shares of this newspaper firm are still down double-digits in 2011. Despite that lackluster performance, 2012 looks more promising for shareholders.
In December, an inverse head-and-shoulders setup in shares of Gannett pushed through its neckline, indicating exhaustion among sellers. Since then, shares threw back to retest that newfound support level at GCI’s neckline, then pushed higher. $13.50 has been a resistance level of note since back in August -- traders should watch for Gannett’s ability to push though that price level.
Elan Corporation 1-Month Relative Strength: 21.26 per cent
Nearest Resistance: N/A
Nearest Support: $13
Elan Corporation is breaking out, driven higher as buyers pile into shares of one of the best-performing stocks of 2011. Shares of this mid-cap biotech firm have already more than doubled year-to-date, and a new 52-week high in shares is providing some extra psychological impetus for buying.
Making new 52-week highs is significant from an investor psychology standpoint because it means that everyone who has bought shares in the last year is sitting on gains -- as a result, the “back to even” mentality is less of a concern than it would be for a name with a higher proportion of shareholders sitting on losses. If you buy this breakout, I’d recommend keeping a protective stop at $13 support.
MBIA Inc. 1-Month Relative Strength: 19.48 per cent
Nearest Resistance: $12.50
Nearest Support: $11.50
Municipal bond insurer MBIA Inc. has been able to breathe a sigh of relief this quarter, as legal settlements reduce some of the headline risk that’s plagued this stock for much of the year. While this stock’s performance has been stellar in the near-term, year-to-date numbers haven’t been quite as compelling – the firm’s value has dropped by more than 4 per cent in 2011.
As positive as MBIA’s recent price action has been, this stock is looking somewhat toppy, testing support at $11.50 in today’s session. In the very short-term, lower highs could point to a descending triangle in shares of this financial firm -- but traders would be advised to withhold judgment until either resistance or support is breached.
Cintas 1-Month Relative Strength: 13.95 per cent
Nearest Resistance: $35.28
Nearest Support: $34
Cintas has been showing investors outsized relative strength this year, most recently thanks to positive earnings for the company’s fiscal second quarter last week. As with shares of Elan, this uniform company is bumping up against 52-week highs today; a breakout above those levels would be a strong signal that buyers are in control.
Momentum, as measured by a 14-day RSI, remains in a strong uptrend right now, a fact that provides some semblance of confirmation that shares are likely to continue trending higher. While $34 support is fairly weak, I’d recommend using that price level as a protective stop at this point – more substantial support is well below current levels.
Bankrate Inc. 1-Month Relative Strength: 12.96 per cent
Nearest Resistance: $21
Nearest Support: $17
Last up this week is Bankrate Inc., a financial publishing firm that went public this summer in one of the more successful IPOs of 2011. Bankrate’s relative strength looks likely to continue into 2012 thanks to a bullish setup in shares.
From a technical perspective, Bankrate is forming a “V-Bottom,” a reversal pattern that triggers when shares push through a previous resistance level. In RATE’s case, that level is $21 -- a price that this stock is testing today. If shares can confirm a breakout above $21 in tomorrow’s trading session (the last of the year), then traders have a good indication to buy. If you take this trade, I’d recommend placing a protective stop just below the 50-day moving average.
Jonas Elmerraji is Senior Contributor to TheStreet.com