Significant stocks that were leading the S&P 500 higher over the last six months have significantly diverged over the last six weeks. This handful of financials have lost their luster and a stock often called an "economic barometer" is well off it's high even though the S&P 500 is back near it's high.

Fedex (NYSE:FDX) is an economic barometer which means it often can be used to judge expectations on the economy down the road. As an economic type indicator it will often provide some lead time, so the fact it has diverged with the S&P 500 doesn't necessarily mean the S&P 500 will see an imminent reversal. In 2007 Fedex peaked in February and then made lower highs. The S&P 500 didn't peak till October, so Fedex flashed a cautionary signal several months before the S&P 500 reversed course. Fedex broke support at $130, and while it may rally a bit, technically it will be difficult for the price to create new highs before moving lower first. Ultimately a rise back above $144.39 (high) is a strong sign for both the stock and the S&P 500. The chart below compares Fedex to the S&P 500 (black).

Morgan Stanley (NYSE:MS) fell strongly off it's $33.52 high in late January. While Morgan Stanley is still outpacing outpacing the S&P 500, since January it's shown relative weakness. Since corrections typically unfold in three major waves, the third is still to come providing downside targets of $27.60, and if that's exceeded, $25.80. The wave lower is likely to be kick started by a drop below the February 3 low at $28.78. The recent high at $30.55 can be used as an initial stop, as a rally above that could spark a short-term rally.

Goldman Sachs (NYSE:GS) is now underperforming the S&P 500 over the last six months (percentage terms) and is showing significant relative weakness in 2014. A strong January sell-off took the price well off the $181.13 high. So far in February the price has been consolidating. A drop below $159.77 is likely to bring another wave to the downside with targets at $153.50, and if that is surpassed, $145.50. Just above $166.50 provides an initial stop area, as a jump above that could trigger short-term buying.

Lloyds Banking (NYSE:LYG) is still outpacing the S&P 500 in percentage terms, has weakened in 2014, but not as much as Goldman or Morgan. Compared to those stocks, Lloyds is acting stronger as it is still in close proximity to the January high at $5.76. A drop below $5.21 is likely to induce selling into the $5 area. A pop above $5.65 is likely to retest the high, and exceed it, as the uptrend is currently still in effect.

The Bottom Line

Relative strength and weakness is one way to determine which stocks to trade and which to avoid. When trading, buying stocks that are relatively strong, while shorting (or avoiding longs) those that are relatively weak makes sense. No method is perfect though. What is weak this month may be strong next week or month. Therefore, trading based on relative strength and weakness requires homework to keep apprised of changing conditions and can be a very active trading approach based on the time-frame analyzed.

Disclosure - At the time of writing, the author did not own shares of any company mentioned in this article.