The Nasdaq-100 index has outperformed the S&P 500 and most other market indices throughout the six-month rally. Therein lies the challenge for traders and investors who are looking to get on board this fast-moving train. In other words, the index has ramped up so quickly, and without pullbacks, that it's hard to find bargains within its 100 components.
However, there are still good trades in this tech-heavy arena, thanks to the leader-laggard dynamic that's common in big liquid indices. It goes like this: As the hottest components move higher, funds take profits, and that frees up cash for purchases in lesser-performing names. This rotation raises the odds that laggards will eventually catch fire and join their better-performing cousins.
To find these potential winners, I sorted index components by their relative positions, vis-a-vis the 200-day moving average. Index leadership tends to float to the top of this performance list, while laggards drop to the bottom. Then I examined price patterns of the bottom-dwellers, looking for accumulation, growing interest and evolving uptrends.
Four stocks stood out in my chart review as prime candidates for rotational cash as market players take profits in the index leadership and go hunting for new winners. These potential beneficiaries are
Hansen Natural is currently the 11th-worst performer in the Nasdaq-100 index. It sold off from $68 to $20 in the 2008 crash, bottoming out in October. It mounted the 200-day moving average in December and stalled two months later at $44. The subsequent pullback has been long-lasting, with price struggling to get back above the moving average.
The stock finally cleared that level last week and is now headed into a test at the August swing high at $37. Accumulation is building quickly, suggesting a healthy breakout over that resistance and a continued recovery that could reach the May high in the next month or two. With a little luck, advancing price will take a run over $50 in 2010.
occupies the sixth slot on the index laggard list. On the surface, this weak positioning makes perfect sense, because the stock has gone absolutely nowhere in the last 12 months. However, if you back up and look at the weekly chart, you'll see that it paints a more bullish picture.
The stock dropped from $57 to $36 last year and bounced in October, ahead of the broad market. Price action since that time has pivoted back and forth across the 200-day moving average. In turn, this oscillation has generated a massive triangle pattern that could set up a major breakout in the next few months.
O'Reilly Automotive is engaged in a strong bull market, but you wouldn't know by its 14th position on the Nasdaq-100 underperformance list. Timing is everything in the financial markets, and this issue made the list because it suffers from bad timing. However, the stock is well positioned to outperform its index peers in the next six to 12 months.
The stock recovered well ahead of other index components, tagging an all-time high in May and dropping into a long overdue consolidation pattern near the rally high. It has been grinding sideways for the last four months, struggling to get over the 50-day moving average. A rally through stubborn resistance at $39 could signal the start of a new uptrend.
resides at No. 15 on the loser's list. Like O'Reilly, this issue also led its peers out of the bear market, hitting a multiyear high at $90 in January, It then pulled back and got caught in an active downtrend that dropped price under the 200-day moving average in March, at the same time other index components were waking up from the dead.
The stock found support in the mid-$50s, ground out a four-month basing pattern under the moving average and surged higher on heavy volume earlier this week. The rally filled the huge April 1 gap and set up a key test at the March swing high at $81.20. Notably, that's the only obstacle between the current price level and a 2009 high.
Alan Farley provides daily stock picks and commentary with his "Daily Swing Trade" newsletter.
At the time of publication, Farley had no positions in stocks mentioned, although holdings can change at any time.
Alan Farley is a private trader and publisher of
Hard Right Edge
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. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks.
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