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Four Mid-Caps for a Trendless Market

This column was originally published on RealMoney on Aug. 26 at 11:09 a.m. EDT. It's being republished as a bonus for TheStreet.com readers.

During a choppy, trendless market, finding stocks to buy can be tricky. This is simply because most stocks trade in sync with the market, so an erratic market makes for erratic stock prices.

But a focus on relative strength can help skim winners out of the field.

The concept of relative strength is pretty simple. Even though most stocks run with the market, some just run faster than others.

During a weak market, I look for those stocks that are the strongest, the ones that are "less weak" relative to the rest. Doesn't this make sense?

In an environment where everyone is eager to sell, look for the stocks with the least amount of selling pressure. When the widespread selling pressure wanes, the relatively strong stocks really take off while most stocks are still recovering.

None of the indices are particularly peppy. They are all resting. But of all the major indices, the S&P 400 MidCap Index looks the strongest to me -- it was the "best of the mediocre."

No, I didn't crunch a bunch of data to arrive at this conclusion. Rather, I reviewed all the indices on my watch list and picked the one that looks the strongest relative to the others (i.e., the best of the mediocre).

I then decided to look for the "best of the best," i.e., the strongest stocks within the S&P 400 MidCap. That was simple. I just screened for those that are at 52-week highs.

Nine stocks popped up:

  • York International (YRK)
  • Sandisk (SNDK)
  • Amerus Group (AMH)
  • Borg Warner (BWA)
  • Harris (HRS)
  • Pioneer Natural Resources (PXD)
  • Alliant Energy (LNT)
  • Plexus (PLXS)
  • Storage Technology (STK).

    Of those nine, I selected the four that look to present the best trading opportunities: Sandisk, Harris, Plexus and Pioneer Natural Resources.

    So let's look at the S&P 400, along with the stocks that are doing just fine in a difficult environment.

    S&P 400

    The $MID hit an all-time high just a few weeks ago. That's right, not a 52-week high, an all-time high, which is certainly strong relative to the rest of the market. The index has come in off its high, but not by much. I'd say 700 has a decent chance to hold as support, but even if it fails, the breakout level is down only another 25 points. None of the secondary indicators are negatively diverging, so the MidCap Index looks good to me.

    The typical definition of a mid-cap stock is that the underlying company has a market capitalization of between $1 billion and $5 billion. So now let's look at four stocks that fill the bill.

    Sandisk

    After the stock gapped higher on a strong earnings report last month, the bulls have never really rested. The recent mild pullback is just further evidence of the buying interest. After a 25% run-up in the last month, there has been precious little profit-taking. The stock looks like it moves higher from here, but I'd keep a loose stop on it. After all, the market can be fickle.

    Harris

    Harris recently broke out above the $35 level after having failed for the past several months. There has been no real chance to get in since then, and the secondary indicators all look strong, confirming the price action. After more than eight months of consolidation, this stock looks like it has room to run.

    Plexus

    Over the past 15 months, the bulls have been buying the stock all the way up to $15. But that's as high as they've gone, because there have been plenty of sellers at $15. But it looks like the selling is pretty much over, and a bottom has finally been completed. I'd pick up some stock here, with a stop at around $14.

    Pioneer Natural Resources

    Pioneer Natural Resources has also broken above multimonth consolidation. The relative strength index (RSI) has been consistently above the midline for years, signaling a persistently strong stock. Similarly, the accumulation-distribution line continues to move higher. So Pioneer looks good now, and I suspect it will get even better if the broader market starts moving higher.

    Be careful out there.

    P.S. from TheStreet.com Editor-in-Chief, Dave Morrow:
    It's always been my opinion that it pays to have more -- not fewer -- expert market views and analyses when you're making investing or trading decisions. That's why I recommend you take advantage of our free trial offer to TheStreet.com RealMoney premium Web site, where you'll get in-depth commentary and money-making strategies from over 50 Wall Street pros, including Jim Cramer. Take my advice -- try it now.

    Dan Fitzpatrick is a freelance writer and trading consultant who trades for his own account. His columns focus on quantitative strategies for trading and investing. Fitzpatrick is a member of the Market Technicians Association and manages The Stock Market Mentor, a Web site focusing on the proper use of technical analysis for trading and investing. At time of publication, Fitzpatrick held no position in any stocks mentioned, though positions may change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While Fitzpatrick cannot provide investment advice or recommendations, he appreciates your feedback; click here to send him an email.
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