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Relative Strength: Identifying Alpha in Market Weakness

Key Takeaways

  • Investors should focus on a handful of reliable, simple indicators.
  • Relative strength is one of the most powerful indicators.
  • Use blood red market days to identify relative strength opportunities.

Simplicity is Sophistication in Trading

In my over two decades of investing and market analysis, I have studied a wide range of strategies and indicators. With the advent of complex trading software and technology adding and analyzing these indicators has never been easier. That said, there is an opportunity cost to watching too many things at once – paralysis by analysis. A trap that many amateur traders fall into is following too many indicators. By following too many indicators, traders can fall into the trap of indecision. Instead, investors should focus on a few powerful, reliable indicators. In my experience, the most powerful and simplest indicator to understand is relative strength.

Relative Strength: Use Red Market Days to Your Advantage

Down days like Tuesday and unexpected “tape bombs” are inevitable and unavoidable on Wall Street. Instead of tuning out these down days, veteran traders understand that there is actually far more value in watching them extra closely. That’s because most stocks follow the general market’s direction. In other words, if the Nasdaq is up 500 points, most stocks on your watch list will be green. Conversely, if the Nasdaq falls 500 points, most stocks will be red. That’s where relative strength comes into play.

During blood red down days, a handful of stocks will buck the market weakness. Why is this important? On market down days, the strongest stocks stick out like a sore thumb.  Investors should pay close attention to stocks that are green or fall less than the market and their peers. Envision a beach ball held beneath the water’s surface in a pool. The stocks that hold up the best typically spring out of the gate like a beach ball being held underwater when the market eventually firms up. In other words, if a stock doesn’t go down in a tough market, it is unlikely to in a strong one.

5 Stocks Exhibiting Relative Strength

Advanced Micro Devices Ahead of New Product Release

Investors bid up shares of Advanced Micro Devices ((AMD - Free Report) ) on Tuesday in anticipation of AMD’s Helios Platform and MI450 release. These products could position AMD to take a piece of the massive hyperscale GPU market – a market worth hundreds of billions in revenue. Wall Street analysts expect AMD’s EPS to grow by a healthy 60.33% in 2026.

Zacks Investment Research
Image Source: Zacks Investment Research

Baidu Rises on AI Success

Baidu ((BIDU - Free Report) ), “The Google of China”,driven by positive news that its Ernie AI assistant surpassed 200 million monthly active users and the expansion of its Apollo Go robotaxi service to Abu Dhabi, reinforcing investor confidence in its AI growth story. Additionally,investors are excited about the potential spin-off of its AI chip unit, Kunlunxin. BIDU earns a best possible Zacks Rank #1 (Strong Buy)

Zacks Investment Research
Image Source: Zacks Investment Research

ALAB Bucks the Trend

Astera Labs ((ALAB - Free Report) ) bucked the market weakness on Tuesday. Wall Street expects strong sequential revenue growth and solid profitability, with analysts forecasting continued earnings and sales increases. ALAB shares have regained the 50-day moving average and are building the right side of a multi-month base structure.

Zacks Investment Research
Image Source: TradingView

Small Caps Outperform

Finally, the long-awaited market rotation into small cap stocks has come to fruition. Year-to-date, the Russell 2000 Index ((IWM - Free Report) ) is up nearly 7% while the Nasdaq 100 Index ETF ((QQQ - Free Report) ) is lower by a percent.

Critical Mineral Stocks Soar on Geopolitical News

Critical mineral stocks likeUnited States Antimony ((UAMY - Free Report) ) soared Tuesday amid a renewed tariff dispute between the U.S. and several European countries. The Trump Administration has made onshoring critical mineral production a priority.

Bottom Line

The stocks that refuse to drop in a tough market are often the ones that will lead the next leg higher. By utilizing relative strength on down days, investors can identify the best long opportunities.

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