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US Stocks Falter But a Few Remain Strong

June 3, 2019 By Cory Mitchell

In both the US and Candian markets, fewer and fewer stocks are showing up on scans that meet uptrending criteria. Such scans include stocks that are above their 100-day and 200-day moving averages, and that are close to their highs. Add in additional criteria like improving quarter-on-quarter sales and earnings and the list of strong stocks gets very small.

The S&P 500 is about 7% off its May 1, 2019 at the time of writing. That is a typical bull market correction, which means this actually may be a good time to start looking at strong stocks and seeing which ones are poised to breakout. If the correction is near an end in the major S&P 500 index, those strong stocks will likely start breaking higher soon.

That said, there are no guarantees this will be just a normal bull market correction. With the trade war starting to cause more concern that it will continue to drag on, a 20% drop (like in October and November of 2018) or more can’t be totally ruled out. In that case, buying almost anything for swing trading purposes is likely to end in disappointment.

The following chart shows the S&P 500 Index. A zig-zag indicator has been added, showing only moves over 10%. As you can see, 10%+ corrections are fairly rare, except for during choppy periods like 2015 and early 2016. We could be in a similar period now.

S&P 500 index with zig zag indicator

A strong stock is a stock that is performing better than the S&P 500. It is in an uptrend and is trading near its highs. I also added in the criteria that the stock must have greater than 20% QoQ sales and earnings growth. They must also have significant volume. There are only a handful of stocks on the US exchanges that meet these criteria.

The following charts and stats are provided by StockRover.com.

PaySign (PAYS)

The company offers prepaid card programs, primarily to businesses. This stock is trading near its highs and is currently consolidating. Sales and earnings have been improving, especially sales over the last year. Earnings are expected to jump to their highest historical levels, but that is yet to be seen. In the meantime, traders are bidding the stock up in anticipation.

PAYS chart and sales and earnings

DMC Global (BOOM)

This company produces products for the energy and industrial markets. The stock is consolidating near highs after a strong run higher earlier this year. Earnings have been all over the place in the past, but have improved and are expected to be even better this year. Sales have also been rising above prior levels.

DMC Global chart and sales and earnings

Progressive (PGR)

The insurance company is in a tight consolidation near its highs. Except for a hiccup in 2016, earnings have grown year-over-year, and so have sales.

PGR charts, sales, and earnings

Arch Capital Group (ACGL)

The insurance company is consolidating near highs after a strong push higher so far this year. Sales and earnings have a mediocre track record for growth, but earnings are expected to break into new highs this year, and sales are also near highs currently.

ACGL chart, sales, and earnings

Woodward (WWD)

This company creates energy control solutions. Its had a strong rise this year, currently consolidating near highs. Sales and earnings have been steadily on the rise, overall, the last several years.

WWD chart, sales, and earnings

There are other stocks out there are strong, but these are the handful that meet the criteria of having strong earnings and sales growth recently, as well as a moderate amount of growth in these categories over the longer-term. These stocks are also in uptrends and trading near their highs.

These are not trade recommendations, but rather stocks to keep an eye on. Watch for breakouts to new highs, especially if accompanied by a rising S&P 500 index. If an upside breakout occurs, stop losses can be kept fairly tight below the consolidations. As for exits, consider a fixed reward:risk ratio or a trailing stop loss.

Do Earnings and Sales Matter?

In the stats above earnings and sales have been included. Many technical traders don’t care about these types of things, since if a stock is going up we just need to look at the chart to see that. I have started to look at them though since I have found that the strongest stock performers each year (and over several years sometimes) are the ones with the strongest earnings and sales growth. So yes, if a stock is moving up, it will show up on any scan for uptrending stocks. But stocks without strong earnings and sales tend to have shorter-lived uptrends than those stocks with strong earnings and sales.

Therefore, I like to look at both the technical picture (mostly) and then look for a bit of confirmation from the fundamentals (primarily earnings and sales). Increasing year-over-year, and quarter-on-quarter sales and earnings growth is typically a good sign. That said, the stock price still has to be showing strength. I don’t swing trade stocks based on fundamentals alone. Everything has to line up. If it doesn’t, wait till it does.

By Cory Mitchell