Ep. 303 This Method Helps Find Stocks That Outperform The Market Over Years
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Hello and welcome to another episode of the Investing with IBD podcast. It's Justin Nielsen here, your host, and it is January 15th, 2025, and we are live on YouTube as we are every week, Wednesday at 5 p.m. Eastern, so live at 5. We do hope that you can kind of like and subscribe on that channel or whatever channel that you're using. If you're using Spotify, Apple, it really helps us out and...

David Kelley

Thanks, Justin. I appreciate the invitation. And yeah, it's exciting. I've listened to you for years and here we are. Yeah. Well, I love some of the stuff that you've got. We'll talk about it a little bit more later on in the show, but you run your own weekly show on Fridays. So we'll make sure that people know about that.

But let's get right into it. Since you're a new guest, I want to kind of give people a little bit of a sense of your background, your style. So could you kind of let people know about that? I can for sure. So I really got turned on. Investors Business Daily, I ran into in Toronto one day in the 90s. And, you know, it stood out. And this was a paper. I fell in love with this thing fast. The old paper version.

and looking at charts and whatnot. And I worked institutionally originally coming out of the math program. I have a math degree, and then I worked institutionally in research, and then I ended up in retail 20-odd years ago. And ever since then, I've been an active investor. And so I started off

You know, kind of making some decisions, not based on necessarily, you know, something good or bad. And there was a day in mid-2000s there that, you know, I was buying a stock and it was running up and running up. And then suddenly next, you know, half of it got erased within no time. And I said, there must be a better way to do this. And I started looking into technical analysis. And, yeah, so I followed through with the Chartered Market Technician Program. Wow.

I should mention you do have those three special letters that a lot of our guests have. One of these days I might go out and get it myself just so I can be part of the cool kids. Yeah, yeah. I mean, I got the C of A first, which is, of course, institutionally what people want to see, right? Right. But, you know, I very quickly realized that fundamentals are great. I like fundamentals. At the same time, technicals do not always match up. And so I'm happy to own something fundamentally strong, but the technicals have to be there.

The chart has to be there because that ultimately is where things come. So I've managed money professionally for 20-odd years and have a discretionary practice and active. I would describe it as fundamentally screened and technically driven and mostly been involved in U.S. stocks and ETFs for a long time because the Canadian market is honestly relatively poor. It's been poor since essentially 2008, really, 2009. Yeah.

And I should mention that you are in Canada. We have very different weather outside of our windows. You were saying you have snow. I've seen snow before. I know what it is, but haven't seen it in a while, just to be honest. So you talked about that fundamentally driven organization.

Or fundamental screens and technically driven. And I think that just really meshes a lot with what we do at Investors Business Daily. What I learned from the founder of Investors Business Daily, Bill O'Neill, who would kind of start with, okay, you start with the best companies and then you use your technicals to find the right time. So what is your timeframe when you're kind of looking at these stocks? How short, how long? What kind of timeframe are you using?

Yeah, so it kind of depends on which kind of stock. So I will call it two distinct investment processes. One would be kind of breakouts of, you know, it can be exciting growth names and the other can be trend following, the long-term trend following, buying large cap leading stocks and owning them until something changes.

because I do believe that all trends come to an end. They don't persist forever. So I do certainly use daily, weekly, monthly timeframes, but I always want to zoom out. And if I've learned anything over the years, it's, you know, you got to be careful. There's so much noise at the short-term level. And I've really, a few years ago, I zoomed out and I did a lot of work and started doing a bunch of, you know, not backtesting, but looking at data and saying, you know, could this have been done easier?

Because I used to use a lot of 50-day moving averages. And in trend following, I got to tell you, what was happening was piles and piles of turnover. And what happens is you sell a stock on a 50-day moving average break, and it keeps going higher, and you don't own it anymore. And so I wondered whether there was a better way.

Yeah. And do you do, are you kind of more of a, okay, I'm going to buy something, hold it, see what happens? Or are you kind of massaging that position as it matures? Yeah, it's a great question. And so, again, it kind of depends, but let's just try to give some real examples. So I'm happy to go and buy a position. I like to buy pullbacks against uptrends.

If I'm buying a long-term leader, okay, I want to buy pullbacks against those uptrends. And so from that perspective, you know, I've got a long-term entry point. And, you know, it's a pretty comfortable spot to be in because now, sure, I'd like the stock to work again right away and continue to make highs. But at the same time, I do want to give it some time, right? I'm not in a rush necessarily, but I also will admit that when I buy stocks, I kind of do expect them to start working in my favor immediately because, you know, obviously, why else would I buy them today?

It's nice to get that positive feedback immediately, right? It is for sure. And that's where breakout buying is different, right? If I'm buying a breakout and it's a huge mover on the day, then yeah, I mean, I'm expecting to have to put a floor beneath me and let this thing go. And I am expecting it to continue on. But from a long-term leader standpoint, what I've done is just, you know, I've built something and I call it the NSYNC universe. And so instead of looking at the S&P and, you know, the Russell 1000, whatever have you, I basically looked and created a screen that looks at the data every quarter. And I look...

What stocks are outperforming the S&P 500 on a one-year, two-year, three-year, four-year, five-year, and 10-year timeframe? And my belief was, hey, these are strong stocks. And they're strong stocks on a lot of timeframes. And so as a result, they should be able to be held a little more comfortably with a little bit more conviction. And if you take that basket of stocks and you zoom out and you put a monthly chart on, you'll see that, yeah, lower left, upper right.

No question. And now you zoom in to talk about timing. Yeah. And so just to be clear, you were saying long-term leader. That's basically your definition. Yeah.

Does it outperform the S&P 500? Very simple, right? Absolutely. And you kind of start with that as your universe of, okay, here are long-term leaders based on this criteria. And just to be clear, are you using kind of just a regular calendar? Okay, I'm using end of quarter, end of year. Or are you kind of looking at from rally point?

Yeah, no, good question. So when I'm, you know, when I'm screening the universe, no, I'm going to just every quarter at the end of quarter, I'm taking the data. And so, you know, right now I've got December 31 data that just passed. And the question is, you know, what's outperformed? And so it's very possible that you can have a very strong stock that's been strong for a long time, but it's been had a poor year. And if it's had a poor year, it's actually not going to meet that screen.

And I think it's fair to say that there are certainly stocks that can embark on short-term two-week rallies that can change that. So again, it's a matter of being aware of it. So when I watch the universe itself change quarter to quarter, some stocks can drop off. I certainly want to be aware. I know what the stocks are, right? That have really outperformed for 10 years plus. I mean, it's not an easy feat, if I'm being honest. I think there's 129 stocks right now that meet that screen. And that's North American listed stocks of $5 billion and higher.

And where does the fundamentals come in? Because a lot of that seems a little bit more technically driven. Price is price, right? But there is that other element of the earnings. So how are you...

mixing that in them. For sure. So from a trend-following standpoint, when we're talking these large cap leaders, I think for the most part, what you'll find is you flip on market surge, you look at the fundamentals and you'll see, yep, these people make money, this stock makes money, and that shouldn't be a surprise because obviously for institutions to be buying these things and pushing these things higher and certainly higher than the indices for so long, I mean, there has to be something going on with the business, right? And I'm a big believer that, of course, price bakes in all the opinions,

So I don't need to be the one that talks to the CEO. I certainly don't need to be the one that reads the annual reports. But market surge is a great place because in an ideal world, sure, everything has double-digit sales and earnings. It's not quite that simple, especially big mature businesses. You can't expect to see that whatsoever. But again, fundamentals generally to me means that positive sales, earnings growth. PEs mean absolutely nothing, just nothing. I

I don't even look at that, to be honest. Right. And again, you're in good company there because that was one of the things that Bill O'Neill railed against. And it just came down to, after looking at a lot of the best performing stocks, that just wasn't one of those variables that mattered so much. But...

When you are looking at those fundamentals, I mean, certainly one of the things that sticks out to a lot of people is how much volatility is around sometimes those earnings announcements. I mean, they happen four times a year for every stock. Yes.

And you've got some that are pretty mellow, but you've got others. And these can be big moving – I mean, Meta not that long ago was up or down 20% on its earnings. And this is a trillion-dollar company. So how are you handling kind of that –

that fundamental part when it's having such an impact on the technical side? Yes. Well, that's a great question. So the character of a stock, I mean, can be very different. I mean, just because it's a large cap stock going up, that does not make it the same as the next large cap stock going up. And so I do a lot of volatility analysis. I tend to use ATRs, so an average to range. Okay.

And from an average true range perspective, I use actually ATR 20 divided by moving average of 20, which is an approximation of price, how much price movement I can expect on an average day. And when you get to know the stocks over the time and years, you start to know what their character is. And so let's just give a couple examples. So if you're going to look at, for example, Tesla is a great example. It's a much more volatile stock than Syntas, like huge difference.

And so they may both be large, but they're not at all the same. And so you need to understand the character because from a position sizing standpoint, the last thing you want to do or the last thing I certainly want to do is go and buy too big a position of something that is just too messy and is subject to, as you say, wide, wide swings. So that's...

That's where that's where capitalization comes into. Right. So obviously, there's a lot more volatility at the smaller side. If I'm sitting here looking at a business like this, 80 billion dollar market cap, I'm going to naturally expect there's less volatility in the stock than there is in something, you know, obviously a tenth of the size.

But by getting to know the character of every stock and getting to know really the character of that universe I'm talking about, I certainly become more and more aware of it. So here's an example. SMCI actually met that universe recently during the rally. Of course it would not anymore. And I think the timeframe – yeah, I think it's probably a little – when did it IPO? I can't even remember. Oh.

Oh, there it is, 2007. So this is an example whereby if I'm going to go and look at a stock on a long-term basis, essentially what we want to see is we want to see the long-term chart, but we also want to be able to see whether that gain is compressed into some kind of short timeframe, which has skewed all the numbers. So I think we can see this has been a huge leader, but I think you can also see by the chart there that really 2021, 22, that's when this thing took off to the moon, right? But this is a very volatile stock, you know, to say the least.

So, you know, I certainly wouldn't want to be surprised and I would definitely not be surprised. But when you buy a stock like this, yeah, it could move up and down 15 percent like, you know, a morning, as you know. And so from that perspective, you don't get to be surprised. And so earnings, which you mentioned, is very important. So you're right. Four times per year we get earnings. And as a general rule, I don't take new positions 10 days in front of earnings. I'm just not really interested because, frankly, I don't know what's going to happen anymore.

And as I always like to say, even if you know they're going to announce earnings or a loss or whatever have you, you don't know what the stock's going to do. It could do the total opposite, right? I'm right there with you. You could give me the headline, and I don't know that it would help me sometimes. Absolutely. Absolutely.

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Upgrade your playbook and make the switch to NetSuite, the number one cloud ERP. Get the CFO's guide to AI and machine learning at netsuite.com slash wallstreet. netsuite.com slash wallstreet. Well, you know, let's shift gears a little bit because, okay, so we're kind of getting an understanding of the universe that you're picking from. But let's talk a little bit about anchoring, you know, because with portfolio construction, it's really important. How do you kind of...

build that portfolio to be something that you can weather storms with. You're not in all of the heat. You're not in quantum computing, AI, nuclear, and all of these things. Saying, oh, look, I'm diversified.

So how do you kind of approach that anchoring your portfolio so that you're able to be patient with it and able to take that long-term perspective? Yeah, great question. So essentially using those ATR numbers that I gave you, what I do is I look at the position sizes of the positions. And so if I add a portfolio up, I can actually just add it up. If you have a 5% position of this and you have a –

4% position for this and a 7%. And so that gives you a gauge as to how much kind of risk you have on the table. It's kind of a crude measure of open risk, if you will, in terms of what kind of movement I can expect. So let's just say I've got two sets of data. I've got trend following data and I've got breakout data. Now, I happen to know full well that the two sets of data using those two distinct processes that I manage essentially have a limited correlation between the two data sets because they're different. They're doing different things.

So then we can certainly – I can put my CFA hat on and I can say, well, if we have different portfolios and we have risk and return, by the time we combine them, what ends up happening is we actually don't take the risk of one of the portfolios and we have less risk overall. Right? So if we're combining two approaches, we're getting –

you know, a less risky approach for the amount of return we're seeking. And that's exactly what the concept of diversification is, except that a lot of people, of course, diversify and they think diversifying means owning a whole bunch of stuff and some of it's like junky and some of it's good. And that, of course, offsets. So if everything you're doing is obviously seeking toward, you know, here's your opportunity you're seeking. Now the question is, how do you put those portfolios together in what size positions to be able to have a portfolio you're comfortable with? And some of it, it's just by experience, right? Yeah.

So let's dive into that a little bit more, the position sizing. You know, you mentioned, oh, you might have 4% here, 7% here. How do you make those choices? Like what gets more of your money? Is that a function of, oh, this was working and so capital appreciation made it larger or it was working, I added to it or it was more liquid and so it got more money at the outset?

Yeah, good question. And all those answers can be true, right? So let's use a position like Axon, okay? Can we maybe put up Axon, A-X-O-N? You got it. This is a large company, and this is a very strong company. It's been going up for a long time. And if we were to look at a big picture monthly chart, let's say, you're going to see that this thing's been going from the lower left to the upper right for, you know, let's just call it 15 years for the sake of simplicity.

So this is a stock that, you know, it doesn't have a lot of volatility. It's not volatile like even Tesla. It's certainly not volatile like, I don't know, Dutch Bros or, you know, crazy names like that. And so, again, it's a large name and it's in a strong uptrend with a lot of institutional sponsorship. So let's just pretend that I'm going to go and take a position on this. I'm probably going to go and buy a 4% or 5% position.

And then what happens is if this stock is a stock that keeps going, it's going to be growing probably as a percentage of the portfolio naturally. Right. And then what happens is if it's if it does set up again. So let's say it gives me an intermediate term, you know, either a pullback or comes out of some kind of base. I'm definitely OK to add to something, especially if it's a profitable winning name that has been sitting there.

And then the same thing can work in reverse. If there ends up being some kind of sell signal that kind of seems a bit sketchy and the position's grown, even if by market, I'm going to want to possibly trim that back and take a little bit off the top. And so, again, depends on the kind of name. And that really speaks to the volatility of how that portfolio is constructed. Does that make sense? Yeah. Oh, absolutely. Absolutely.

Because you've kind of spent some time here on what it takes for something to get in your universe and what it takes for it to kind of stay in there, maybe that's the next question. What does it take for you to get something kicked out? And maybe we look at something like you mentioned in the pre-show, Eli Lilly. Yes. I mean, it definitely has that look up and to the right. Really strong move. But...

on this monthly chart that we're looking at, it's faltered a little bit more recently. Absolutely. And so again, obviously great example. So this is the stock that actually, a few years ago when I ran all this data, I said, wow, this Eli Lilly stock has been such a mammoth stock

How come I've never managed to own this? That's what happened. And then I plotted a 50-day moving average on top of Lilly, and I said, oh, well, now I can see why. Because if you plot a 50-day moving average on Lilly, what you'll see is you'll never own this thing. You will constantly sell this thing, and you will never own it. And yet here it is a decade plus later, and it's a very, very strong stock.

So, again, what happened is that, you know, in 2022, the bear market comes to an end. This is one of the many stocks that bottomed before the market, I'm pretty sure. So what you'll see is that's, you know, from my perspective, that's a good sign. I'm always watching the markets, right? So if you've got stocks and industry groups and sectors that are going to bottom ahead of the market, top ahead of the market, I certainly want to be aware of those kinds of things.

But the bottom line is that this is a massive leading stock. And so if we're coming out of, let's say, an equity market condition that says, hey, we've got to start taking some risk, this is an early leader because it did not have the wear and tear at the final end of even October. And now it's going up. And now what do you do about it? So the thing with trend following –

where I'm at right now, remember, I came from a 50-day world, which is useless in Lilly. But when I'm looking at a stock like this, I've got a couple of fail-safes, and I certainly have ways of gauging whether there's something wrong. But a 34-week moving average is one example of something that, to me, causes me

trouble and I don't generally hold through a 34 week moving average break. Right. So I think what you've got on the screen right now is a monthly, just to be clear. So we've got an uptrend. I absolutely agree. It's still in an uptrend, although you're right. It's, it's been deteriorating for a while, but if you look on that weekly, what's happened now is we've lost that 34 week line. And, and that's really the first time we've lost it in a while. And so every time a stock has gone through what I'll call an unusual period of gains,

because I'm pretty sure this stock was up 160% plus off the 2022, for example. Actually, from the beginning of 23. That's a pretty decent gain, certainly stronger than the market. And so from that perspective, as the stock starts to show wear and tear, what's happening is we're zoomed in, let's say. So daily action comes at you. And we've got a date. I think it's July, what did I say it was? July the 18th. I want to say July 18th, something like that. July 18th on the daily chart. Let's just zoom right in and look at what happened. So on July 18th,

What you've got is there's a 50-day moving average break, but I want to tell you that the volume, and I use a force index, which is an Alexander Elder force index. It's not going to be able to be shown on Market Surge, but I can tell you that the 50-day break that we're looking at right there in July is not at all the same as the 50-day break in April.

Not at all the same. So yes, it broke the 50-day moving average. But remember what I already said. I certainly don't want to go sell a position after a couple of years in a monster gainer just because it broke a 50-day moving average. But July of 2024, that was different. And that's because suddenly volume was ganging up on this. And so what's happening is you're seeing deterioration. And the deterioration comes in the form of massive volume against. And I don't like that. And then if you look at that just to the right of there, that stock tried to rally back right

really didn't make any new high ground. I mean, sure, it made marginal highs, but it basically faded again. So if we now were to zoom out and look at the weekly, what you're going to see is you've got a stock that's essentially stalling, and that's the RS dying away, right? So the stock is dying away. And who knows? Maybe fundamentally someone's going to say it's a rich stock, right? It's too expensive. I don't know. Not really my problem as an investor. My problem is, of course, to identify when there's character change

And so that's what happens is that you get daily price moves that seem to be unusual. They start to cause weekly deterioration, and then you can start to see a slowing monthly. And, you know, again, if the 34-week average is still in place, that's kind of a fail-safe that I'm going to exit on if we get there. Yeah, and I want to bring it back to the fundamentals because it's worth noting that, I mean –

you know, here we are accelerating growth on the earning side with triple digit. You know, I mean, it went from 10 cents to over a buck on the last earnings per share, but

technical action just painting a very different story. So especially with something like, I mean, Novo Nordisk, Eli Lilly, you know, you had kind of this trend, this news, this, I guess, speculation of the total addressable market, the TAM, on weight loss. And that was really kind of driving these stocks. How do you, you know, I guess, how do you know when it's over? Because you certainly don't see it in the earnings right away.

Yeah, so great question. So let me first disclose, when I bought this thing in, let's say, 2022, I didn't like weight loss. I'm not cluing into that. I'm just looking at a stock that's a large cap stock that's incredible. To me, the story tends to sort of hit my attention after.

after, right? And that's the way strong stocks work. Like, you know, we sit there and see the headlines long after this thing's moved. And so then it's like, oh, I see, you know, the weight loss thing. I've heard about these weight loss stuff. Obviously they're involved. And so you start to clue in, but you know, you brought up a point already that I want to address as well. So let's pretend we know that Lilly does that and has a product and let's pretend Novo also does.

You know, the very first thing I'm also going to do, let's say there's two strong stocks. I'm also going to plot one divided by the other. And I'll tell you that if you do plot, and I don't know if you can do it market surge, but if you plot Lilly divided by NVO, what you'll see is that clearly Lilly's the leader. So if we were to ever have a conversation, you said, hey, I really like the Novo pullback. I'm going to say, well, Lilly's stronger, and we're talking about the same group and whatnot. So the bottom line is that the story to me doesn't honestly mean much. It's fun, right? It's entertainment almost.

But when you're dealing with companies that already have a business, right, they have some type of sales, they have some type of earnings, obviously they've got attention on a stock because there's no stock, I don't believe, that can outperform the S&P 500 for that long over that kind of timeframe without having some kind of fundamentals driving all these institutions there.

Right. Which maybe I could just touch on the institutional sponsorship number in market surge, which I absolutely love. When I see sponsorship that also is rising, I love that. Right. So I have another basket of stocks that I call four quarter rising. And so if I go and look, you know, I want to see those numbers rising because obviously more institutions continuing to report ownership is a good sign. And often what happens is that by the time that starts to deteriorate or by the time those earnings that we're talking about are deteriorating,

yeah, the stock already long peaked. And the last thing I want to do is hang around because the story was still intact, right? It means nothing. And I opened up a screen here on our market search chart that we've got up here. Again, we're looking at the weekly chart with, in this case, a 13 and 34 week is our green line and our pink line that David was talking about. We have our default 10 week and 40 week moving average line. That's the red and the

respectively. But yeah, the number of funds, is this what you're looking at? Because the number of funds went from 4,375 in March 2023 to 5,669 in September 2024. So quite the increase. And

Anytime I'm going to be faced with an A versus B decision and I'm going to see a rising sponsorship number like that, I like it. To me, that's a fundamental because there's a bunch of fundamental people with the fundamental hats on only that are included in that number. And so that, to me, speaks very well because from my experience, in the same way that stocks tend to come under massive distribution and change tune before there's a story to explain why, the truth is somebody's doing that selling. Right?

And that's where we get into some of these stocks. They do peak. And when you've got institutions that have to unload this stuff, they take a long time to deal with their positions. Thankfully, you and I, and certainly me on behalf of clients, it's not a problem. Liquidity always rules. But I certainly am not going to hang around waiting for a narrative to change before pushing sell. And when I'm looking in the comments on YouTube, and very early on when you were doing the Sintas versus Tesla thing,

We had one of our folks say, hey, there's no comparison except when Syntas starts putting batteries in their uniforms. But let's go back to Syntas. And I'll be honest. This was one of the stocks that I had last year that was – I mean, it was so gosh darn easy. It just never gave me a reason –

I just kind of almost forgot about it because it was traveling along that 10-week moving average line in such a calm way. What kind of turned you to, oh, okay, maybe something's wrong here?

Yeah. So, again, it's a concept I call the biggest bar against. I mean, this is what's happened in Syntest. So Syntest, I was longer term than you because I bought this in 2022 as well. And so essentially owned it the whole time because it's a great name and it's a pretty low volatility name as stocks go. But what ends up happening is we have something that, you know, to me looks like character change. And I'll tell you, that's December the 9th.

just at the tail end of the year there. If you put the daily on, you'll see December 9th. That day, now again, I can appreciate the simple comment is that, oh, that was the 50-day moving average break, and I agree, but what's different is that that's a heavy bar. That is an unusual bar that, to me, stands out as I look at the chart. That's what I call the biggest bar against, and what I'm meaning by that is that the range represents

The range from the high to the low of that day stands out. It's a long pink candle that is the clear – to me, that's obvious on that chart that you've got up there. I don't see another bar that looks like that. So that, to me, is a problem. Except maybe this one down here. But that's after. It's already gone at that point.

That is only exaggerating what got happened in the first place, right? So when you have that large volume right there, you can see that volume bar. That's going to change my force index, which is essentially a combination of price and volume. And that to me is like, whoa. So that's my first exit. I'll make it.

I'm pushing sell. And then it depends on where we're at in terms of how aggressive is someone. Because if you've been involved for a couple of years, yeah, one bad day doesn't necessarily make the end of a trend. But again, to me, when you're dealing with a stock that's been running for literally years, and it has been, that is a sign of character change. And I want to know about character change because, again, if I've learned anything, it's like when you make adjustments after a rally early, after a rally,

after a peak, you know, it's a lot more fruitful than waiting, of course, until the damage comes in. And then you find out why supposedly the stock is falling, which we've already talked about is useless. When you get that second gap there that you've all already, you know, got highlighted as well. That to me is just like, oops, you know, ugly. So the bottom line is, yeah, sin test gone. Don't own it. Um,

Would I buy it back? No, I wouldn't because, frankly, it's now deteriorated and it's shown that biggest bar against with all that volume. And to me, that's now a damaged stock that at best is going to have to go through a period of consolidation. But let's remember, it's a stock that's outperformed the S&P for a very long time, but now in the short term, right? And I'm talking months now. It's probably going to have to, you know, have some wear and tear and backing and filling. And I'll let someone else...

With some of these that do get damaged, and I mean, like, you know, I'm just going to pull up CrowdStrike real quick because, I mean, of course, when, you know, a lot of us got this blue screen and were locked out of our computers, it was devastating for this company. You know, at what point does it get out of the penalty box?

Well, it's a good question. I'm going to have to zoom out first off to get out of the penalty box. So I'm going to have to check the weekly at the very least, right? So, yeah, CrowdStrike's got a lot shorter history. But so the problem I have with this chart, as an example, so right there at the left side of your cup, right, where you started falling, that same pattern, like that to me, there's your biggest bar against that I just described, which means, oops, I don't like it, which means if I own it right there, I'm a seller. And now what happens is that, you know, that's a pretty – I mean, that was a pretty strong sell-off.

And so, you know, when you're dealing with something that's got, again, massive volume and what I, again, I'm calling the biggest bar against, the rally back, I'm going to be immediately suspicious. And so, you know, again, maybe I like the group. Maybe cybersecurity is great. I'm going to be wanting to know what other leaders are within here that might have, again, maybe volatility in favor, but maybe don't have that kind of, you know, bar against, right? So, you know, you look at Palo Alto. You can look at, you know, California.

Maybe just put that one up is probably a better example. And I mean, this had its own, you know, if I'm just going to use one of your terms, I see a bar against here. Absolutely. So you know what? Actually, I'm glad. You'll walk me right into this. So I can tell you right now that early in March, I'm a seller of that day, that week.

Absolutely. And then what happens, though, as it's consolidating? So we're still looking at the weekly chart. The RS, so the relative strength coming from the hack, which would be the ETF that owns all these things, really started to come on. It was actually an early leader last year, right? As the technology and semis kind of faded away, the hack was actually providing some relative performance. And so from that perspective, it's a matter of now digging in and finding out who these leaders are. So

It is tricky, right? It depends on what you're trying to do. But when you look at a damage chart, CrowdStrike doesn't even meet my screen because it's way too short a history, but Palo Alto does. But the problem is because it's got that now damage, you can see it looks very, very different than the consistency that we've looked at of even a couple of like Axon that we started with.

The stock market's big. There's so many different names you can be involved with that we're allowed to be patient and we're allowed to look elsewhere. I don't have to get caught up with having to own a cybersecurity stock.

stock. And so, yeah, you just have to pick and choose. You know, since we have Axon up on the flip side, I see some big bars for if that's a term that you would use. And certainly a lot of times earnings is a catalyst in this case. When something gets a little bit out of whack where it's like, oh, it's this was kind of a crazy move to the upside. Are you ever kind of like, hey, this is maybe too good to be true?

I am, but it kind of, again, depends on chart context. So when I look at this chart, look at that last move here we had on this weekly basis. In fact, maybe could we put the daily up on this one? If we put the daily up, you'll see lots of nice earnings moves, right? We had a couple nice gaps. So if we started in August, so that's what I'll call, you know, that's breaking out of a base, right? That's a six-month plus base. I love that.

That's a great entry point when you're coming out of a consolidation. Remember, we've got a massive leading stock that, again, just for the record, also, I was sitting through because, again, you're up a bunch because the left side is even better. Right, Justin? So as that comes out of there in August, I'm happy to go and buy the stock there. And so from that perspective, there's your first entry. And then what happens is you have an earnings move on November. And to me, I'm happy to

I'm happy to add there because now we're talking again. Now we're just talking, wow, this is a leading stock. And so, again, what have we done since then? Sure, we've consolidated. There's nothing wrong, right? We're sitting within that same earnings bar that happened. And so, again, I don't have a problem adding to long-term leaders, which this is what this is. And I see nothing wrong with this at all. So if you do look at that, maybe you look at that pink bar there and you say, oh, but that's a pink bar. And I don't know if that's your 50-day moving average.

No, the next one. The red line is our 50-day moving average line. So you have two fairly large pink bars. So maybe kind of walk us through why are these not as concerning? Absolutely. So look at the first one off the top. So that doesn't even – that literally comes back to several days earlier. I mean there's no – it's not breaking out of any range. It's not coming lower. It's really not doing anything wrong. It's not wiping away weeks of progress, which I think the previous ones were. Definitely not.

Absolutely. Because that's that concept, right? The concept of biggest bar against, you need a long day, but it has to be in the context of where it's come from. So even the second pink bar, because all we're doing is we're just still going into that earnings bar, big deal. I mean, yeah, sure, we're about halfway into the bar. That to me is not a problem. But if I want to evaluate it further, I'm going to step out and I'm going to look at the weekly chart of this, and I'm confident what's going to happen here is we're going to see, if we look at the weekly chart, that what's

What pink bar? I don't see it at all. It's not visible anymore. Now, I don't know if you see the same thing as I see, but I just see a weekly pullback that looks to be pretty calm. Looks like six weeks down to me. And I have no problem with that. In fact, I like that as an entry point literally here because it's a calm entry. Right. So I don't see it. I don't see a change in character on the chart at all.

Absolutely. And you know what? We're going to get into some more of these stocks that have these pullbacks. I think this is a great one to kind of start with. But I also want to get your sense of...

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Restrictions apply. See terms at sportsbook.fanduel.com. Gambling problem? Call 1-800-GAMBLER. How does the market, you know, play into all of this? You know, I mean, a lot of these stocks, as you mentioned, Lilly to start with,

It was moving when the market was still really kind of ugly. And back in 2022, it was kind of a first mover in March when we really didn't turn until the end of 2022. So how does the market kind of play in? And I'm just going to throw up a NASDAQ market chart. Or do you prefer SPY, S&P 500? Well, I go back and forth because I look at the relatives all the time.

Right. So last summer. Right. Or, you know, before I think the late spring, you had the technology stocks really started to weaken. I think it was early July. We had that kind of technology reversal, if I'm not mistaken. The biggest bar against on XLK is probably the beginning of July. And so that's the Nasdaq, of course, being overweighted in technology. Is that July, you know, around 9th or something? Yeah. So this was this was the top. And if I remember correctly, this was a CPI report. Exactly.

that came out. The CPI report came out and, you know, nailed what was working. It was a great day for your small cap stocks, you know, in here. They shot up on that CPI report. But anything that had been running well, including, I mean, well, actually, NVIDIA had topped a little bit before that. But yeah, it was ugly for the NASDAQ and tech heavy.

For sure. And so I think that's an interesting point because you just touched on several useful things here under this discussion. So technology is a very big part of the S&P, I mean, even bigger part of the NASDAQ. So pretty important to have technology on your side. And so the XLK showing that reversal there, and I'm pretty sure there's bearish divergences on the charts that I look at. I use a lot of MACDs and things like that. But essentially, you know, one of the other leaders that fell apart way early was AMD that, you know, kind of faded away in March.

And so essentially what you've got is you had some deterioration on some of these semi names starting to happen, right? You had that start to happen. I think ASML gave up a little early. And so what ends up happening is these stocks start to die away, right? And if you can kind of sense the relative strength, they're fading away. What's happening is you're losing strength relatively in the semiconductor space, which was pretty important because the semis were outperforming technology. And so as technology is fading away, it has an impact. It certainly has an impact to the way portfolios are constructed, right?

Because if you end up, you know, clearly overweighted or even arguably market weighted, right, 30% or 32% technology, that can be very hurtful depending on what kind of names you're in. So when that's happening, that's giving me a lot of clues as to what's going on with the

with the character of the market. So sector rotation and understanding what is happening in terms of the underpinnings of the market is super crucial. But the NASDAQ, to me, had peaked out, right? So then the S&P, okay, bigger, broader, that becomes my new go-to. And then what I want to do is kind of pay attention to what's going on there, understand the breadth. And so, again,

At the very least, you put the S&P up. Can we start at the weekly chart? Because I think there's too much noise at the daily level. If we look at the weekly chart right here, I have to tell you, I see an uptrend. I see higher highs, higher lows. I really don't see the problems that everyone was excited about a couple days ago. And again, I get it. Everyone wants to see daily weakness. They want to start talking about tops. They want to talk about presidential changes and whatever it is. But again, there's tons of things that are always kind of, you know, that can drive markets. There's always narrative. Yeah.

But I see a weekly uptrend, and so I certainly see a monthly uptrend. And as a result, I want to keep that in mind because that, to me, is context when I'm going to go and make decisions tomorrow, right? What's the big picture doing? And so, to me, that's the big picture. And so I'm not going to get caught up if we lose the 50-day moving average on the S&P, which we certainly did. In fact, today we probably rallied right up to the underside of it, if I'm not mistaken. Mm-hmm.

And, you know, I just have to say, again, this is that benefit of zooming out, you know, a lot of this, you know, this, you know, this ugly day on December 18th from the Fed reaction. You know, I mean, it's there, you know, you know, it's there, but it just doesn't have the same feel for it. So that zooming out concept that you're talking about is.

It can really calm your fears. Well, it can. But so actually, look, put the daily back on because obviously it's messier. But look, look at what we just did. We just basically recover. I think we closed the gap there on the election day. So if you look at the election day, right? Yeah. The next bar like all of a sudden,

All we just did there is fill the gap to two days ago. And I mean, that seems to be a pretty logical spot to me if I'm looking at a daily chart. You know, when I'm looking at an index, I use a lot of relative strength, you know, RSI on a short-term basis. And I can tell you, we were clearly oversold on a short-term RSI basis. And we even have a bullish divergence.

which to me, you know, again, I think a lot of investors have a habit of kind of, you know, the news starts to build negative, the sentiment builds negative, the fear is kind of coming in and you're getting negative, but you're getting negative kind of too late. And so, again, if you're going to sell, you got to understand, is this a big picture uptrend? Am I trying to sell because I'm worried about losing more money tomorrow or has that money already been lost? And that's a very important consideration. And we're all different. We're all different. Our portfolios are different.

But I certainly don't want to be the seller who comes in in a weekly and monthly uptrend selling an oversold market a year late, right? Yeah.

Yeah. No, absolutely. Just real quick, before we kind of get into a little bit more stocks, I want to just address RSP or breadth. This is something that I was talking about with David Keller not too long ago. And he was kind of complaining a little bit about breadth and how that sometimes portends bad things for the market. RSP, though, I mean, look, as ugly as this –

you know, has been recently, especially on a relative strength basis. And by the way, for those that don't know, RSP, of course, is the S&P 500 equal weighted ETF. So you're taking away that market cap power that these trillion dollar companies have and, you know, kind of looking a little bit more at your average stock. But this was kind of having a little bit of a better bounce recently. So what's your favorite breadth indicator? Or is it something that you just don't find as important? Yeah.

Yeah. So, I mean, again, so equal weight have been underperforming for quite a while. OK, so, yes, we get it right. There's big stocks that drive the markets. It is important. So I tend to look at like a percentage of stocks over the 200 day average percentage of stocks over the 50 day. And so actually, 2024 was almost almost it didn't quite finish there, but we almost got through the entire year with more than 60 percent of stocks down.

In the S&P 500, over 60% of stocks over the 200-day moving average for the entire calendar year. And it didn't quite happen. It faded away at the end, which was very similar, actually. 2017 was a year that that happened when you had that kind of consistency. So to me, you can have rotation underneath. You can have AMD dropping away, and then something else comes up and picks up the slack.

And that's the beauty of understanding how many stocks are rising and falling. And so it is important, but at an equal weight basis, because I know what the chart of RSP versus SPX looks like, I'm really not interested. There's really not much to talk about. It's just not happening. It's not an uptrend.

So I'm not really interested. At the same time, I think it's fair to say that, as you pointed out, sure, there has been some daily selling that just took place there into the end of December. But again, the weekly chart, bigger picture on RRSP, it doesn't look that bad.

Right. I mean, let's be serious. I think there's still like we're sitting we're above the 34 week moving average, which I've already referred to, which on a weekly basis. I mean, I can't tell you that's a bad thing. Right. And so even I think I tweeted this morning, like the mid caps also, they haven't been outperforming at all. Like they're not it's not a good index. But if we really zoom out and we look at what's going on, I don't know if you can kind of zoom in almost. That's too much data to look at like that. You know what I mean? You know what? Let's see.

Yeah, you know what? The only thing I can do is go to the daily. Okay. So, you know what? Let me change it again. Put the monthly on of this. Okay. Yeah, so watch this. And this is MDY that we're looking at now. This is MDY. So let's be serious. That's a lower left, upper right on the right edge of that chart. So that's been going up. So it hasn't been going up as relatively strong as the S&P, I agree. At the same time, I'm talking the right edge. If you look at 2024, that's an uptrend in the last year. Like it is. And so it's like, I don't...

What trouble? You don't see trouble at that edge. But it's not a relatively strong group of stocks. So I'm certainly aware of that when I'm going to be going to make, let's say, an ETF decision and whatnot. Yeah. And then in terms of your sector rotation that you mentioned earlier, you brought up XLK. Are you kind of using like your sector spider ETFs or…

to kind of keep track of that sector rotation? What's kind of your gauge there? Individual stocks and saying, oh, I'm seeing a lot in this area. You know, you went through a number of chip stocks. Oh, something's going on with chips. What's kind of your process? For sure. So actually, I have the breadth data that underlies each of those sector spiders. So if you look at, you know, the 11 spiders, let's say, what you've got is you've got, first off, the ability to plot them versus the S&P always.

So really, in a perfect world, right, we're investing in something that's going up absolutely and going up relatively. That is, to me, the best of both worlds. So if we're just to kind of cut through right now, I'd say that you've got financials and discretionary and communications, and I'll call technology maybe number four. But those are the strongest stocks. Financials had a good day today. The weekly chart clearly looks great. We've had outperformance. Like, it's a great-looking sector.

And I can appreciate some of these sectors aren't quite as deep, right? Like some of the sectors are a little less diverse, let's call it, than the others. But the bottom line is I want to understand the relative strength to the broad market. And I also want to understand what's going on underneath. So if you go and look at underneath every sector, for example, you could create a list very easily. And you can say what's in this sector. And the same way that, you know, in market surge, you can go and say what's in the – I don't know if you can do it at the ETF level in market surge. But you know what I mean, right? Like you can go and –

Yeah. So you could go somewhere. You could go to FinViz and you could put in the sector and you could see the underlying holdings, for example. And then what happens is you can plot all those holdings and you'll get a sense as to where's the strength coming from. And you can do a very simple performance screen and you're going to end up finding the leaders. And so right now, to me, the discretionary sector is the sector.

But that does not mean, let's say, that the home builders, which are part of that sector, are as good as, you know, maybe restaurants or, you know, and so forth, as good as Amazon and Tesla, which are also in there.

Yeah. I'll be honest. A lot of times what I use is I use the actual spiders website. I'll go to the, you know, select spiders, you know, sector spiders dot com sector tracker. And, you know, you open up any one of these and you can sort it by what is the index weight. So you can see, oh, XLC. Yes. Meta Google are, you know, very heavy in there. Netflix is up there.

And that kind of does give me a sense of where things stand. And you can also change the time periods here. So that's one of the tools that I use. But, yeah, it's a great way to kind of, as you said, take a look at where things are. I have a table that I tweet out every week, and it's basically the short and the intermediate and the long-term trend of each of the sectors and each of the big broad assets.

So every week, I want to understand. And so I'm defining those somehow. And it's moving averages, right? So a short-term moving average, I typically call an 8 and 20-period moving average. If we've got a bearish crossover, 8 below 20, we'll call that a short-term downtrend. If we have a 20-period below a 50, we'll call that an intermediate downtrend. And my 13-34 week tends to be my go-to for long-term. And so, again, it's important. That's what relative strength is. I like to see it in 10%.

Right.

And you know what, since you did mention your Twitter feed, I think it's appropriate at this point to mention that at David Cox RJ is your handle there. So for people that want to follow you and kind of get some of those things that you just mentioned that you are tweeting out regularly. And then also you put out your your NSYNC, right? That's a Friday show that you do. Maybe talk a little bit about that.

Every Friday I have a webinar that I've done for I don't even know how long, but a lot of years. And it's called Where Do We Investors Stand? And it's, again, current, right? So it's whatever's happening. I talk about all the different kinds of things, but definitely big picture, small picture, sectors, you know, stocks and, you know, movers, shakers, stuff that kind of fell out of bed and stuff that kind of came to life and want to look at things not only from the context of, hey, this is what I do best.

for a living, right? I'm sitting here looking and analyzing markets. And so it's just kind of, it's almost like journaling, right? It's like you're sharing what you're seeing. And so it's definitely very current. I definitely like to talk about turning points and I have no problem doing that. Just like to talk about whatever's happening. And so I put that out on Friday to my distribution list and online.

Yeah. So let's wrap this up with a couple of these stocks that you were talking about that, you know, like Axon, which you already shared, are having kind of this pullback phase. So they're in that long-term leader universe. They have that outperformance over 10-year, 5-year, and so on. But these might be actionable because they're doing pullbacks. So what else do you have for us? Yeah, so let's take a look at another discretionary stock here, Booking. So BKNG.

And what you'll see here, there's another weekly pullback, right? And so it's a five or six week pullback, which is kind of characteristic of the market. You've had relative strength. This is a stock that just broke the relative strength highs on the recent highs. And so again, I'm telling you, this is another stock that meets the 1, 2, 3, 4, 5, 10 versus the S&P. And so great name, right? Large cap, 160 billion. What do you do? It's the right sector. It's in the right market. And again, does it come back to life? I don't know. I mean, I wouldn't exactly call it dead right now. It's just in a six week pullback. But

But it looks like a good entry point to me. In the same space or the same sector, arguably, would be TJX would be another example. And what you'll see is the same thing, right? You've got a pullback. A little hard to see on your chart, Justin, the timeframe maybe. But the bottom line is you've got a five- or six-week pullback, which – Yeah, we can maybe look at it on the daily to zoom in a little bit. But –

It's a higher highs, higher lows. Sure, it came back, retraced that little breakout there from November. But you can't say anything wrong with the stock, especially when you've started at, let's say, the monthly level. You start at the weekly level. It's a great stock. And it's got the characteristics to be able to sort of stand back up here if that retail area is going to kind of come back in. And discretionaries have been really strong.

So I'm certainly going to want to give it the benefit of the doubt. And I certainly in a market that's operating, let's say, with a little more volatility like the last few weeks, I think the idea of buying into that pullback on that five, six week basis brings some comfort because you got a little bit of almost cushion, even though you're not in, let's say, but you've got a little bit of cushion to sort of, you know, give yourself some room to breathe. You're not going to get extended. You're not buying extended is what I'm trying to get at.

Right. And I should also point out that if you're wrong, you're going to know pretty quickly. Because if you start losing some of those areas that look like support, you were mentioning for Axon, like the

you know, the gap that it was filling, you know, or the earnings. It just came back to that earnings thing. So, you know, there's a certain, you know, a certain point where, okay, if you're going to try a bounce, well, you know where it should get support. Yeah, absolutely. But I think you just raised an interesting topic, because look at that. Look at that chart you've just got on there. So see, the person who paid $698.67 is in a different boat, right? Because they're essentially chasing. And then, like, I don't buy there ever.

That's not my buy point. So the person who buys right there at 700 has a very different problem to look at because their loss is becoming too significant. So if you're buying into a pullback, what you're doing is you're giving yourself the ability to, to suffer a little bit, but I still use a pretty standard kind of IBD, you know, six to 8%. You know, I'm, if, if,

If I'm wrong, it doesn't matter whether the stock has been outperforming for 10 years. I've bought it. I'm off by 8%. It is what it is. I'll throw it away. And I'm happy to sort of stand back in another time. But you've got to manage your losses. And so that, again, that's the problem with looking at long-term trend following is it's not quite as simple as saying that stock's been going up for 10 years. It's going to go up for 10 more. It may not. I mean, you know, it could peak. And that's important to not get caught. And so you have to manage your losses.

Absolutely. Well, I think that's going to be a good place for us to wrap it up here, David. I really appreciate you coming on. Great having you as a guest, and I'm sure we're going to do this again. It's been fun. I really appreciate it, and thanks, Justin. No, absolutely. And again, just as a reminder for folks, you can find David on Twitter. His handle, one more time, was at David.

David Cox RJ you can find him there and again check out some of his stuff he's got some great tweets really informative so appreciate you sharing your thoughts with us and stay warm out there in Canada absolutely I might have to go scrape my car

Okay, very good. Okay, that's going to wrap it up for us this week. Thank you so much for joining us. And we really hope you join us next week because we're going to be live again Wednesday at 5 p.m. Eastern. We're going to have Nancy Tangler on the show. This is going to be another first-time guest on the show. She is the CEO and CIO of Laffer Tangler Investments. So active equity investor.

management research, portfolio management. We're going to get into that, find out Nancy's thoughts on things, and we hope you join us for that. Thanks a lot for watching this week. We'll see you next time. Bye now. Okay, business leaders, are you here to play or are you playing to win? If you're in it to win, meet your next MVP. NetSuite by Oracle. NetSuite is your full business management system in one convenient suite. With NetSuite, you're running your accounting, your finance, your HR, your e-commerce, and more all from your online dashboard.

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