Relative Strength

With the market moving sideways (volatile, but sideways), I’m starting to see some stocks and sectors holding up on a relative basis.  There’s a couple of ways to play this.  First, you could simply avoid the weak areas and go into the strong areas.  Or, you could do a pairs trade.  For example, this month XLP (the consumer staples ETF) is down about 3%.  But, during this month, consumer discretionary through the XLY ETF is down about 20%.  So, shorting the weak and going long the strong could have netted about 17%.  Now, I’d rather do this trade on the other side meaning when everyone is a little more confident and we’ve had a rally.  The reason why is because the weakest areas can rally the hardest sometimes so we could see financials, materials, & consumer discretionary rally hard when we get the next rally.  Also, there is some relative strength with energy vs. financials. 

I think we are setting up for a rally and after it’s run its course, look out for these types of trades to work.

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