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.

Related Articles
  1. Chart Advisor

    Four Chart Patterns To Watch This Week

    This week is likley to reveal if the S&P 500 is in a consolidation with the expectation of a move higher, or if it's topping out. Here's four ways to play either scenario.
  2. Chart Advisor

    Gold Struggles to Climb Higher and May Fall Soon

    Traders will be watching the price of gold over the coming weeks. We'll take a look at how a couple major moving averages are suggesting that the next move could be lower.
  3. Technical Indicators

    Use Market Volume Data to Determine a Bottom

    Market bottoms often carve out classic volume patterns that let observant traders make fast and accurate calls.
  4. Stock Analysis

    Net Neutrality: Pros and Cons

    The fight over net neutrality has become an amazing spectacle. But at its core, it's yet another skirmish in cable television's war to remain relevant.
  5. Charts & Patterns

    Understand How Square Works before the IPO

    Square is reported to have filed for an IPO. For interested investors wondering how the company makes money, Investopedia takes a look at its business.
  6. Trading Strategies

    Who Actually Trades or Invests In Penny Stocks?

    Although penny stocks are highly speculative, millions of people trade them daily. Here are 10 different types who do.
  7. Chart Advisor

    4 Stocks Still Flashing Buy Signals

    In the midst of volatility and a big market sell-off last week, these stocks are flashing buy signals.
  8. Technical Indicators

    Understanding Trend Analysis

    Trend analysis is the use of past performance to predict future price movement of a security.
  9. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  10. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Fintech

    Fintech is a portmanteau of financial technology that describes ...
  3. Indicator

    Indicators are statistics used to measure current conditions ...
  4. Intraday Momentum Index (IMI)

    A technical indicator that combines aspects of candlestick analysis ...
  5. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  6. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  1. Tame Panic Selling with the Exhausted Selling Model

    The exhausted selling model is a pricing strategy used to identify and trade based off of the price floor of a security. ... Read Full Answer >>
  2. Point and Figure Charting Using Count Analysis

    Count analysis is a means of interpreting point and figure charts to measure vertical price movements. Technical analysts ... Read Full Answer >>
  3. What assumptions are made when conducting a t-test?

    The common assumptions made when doing a t-test include those regarding the scale of measurement, random sampling, normality ... Read Full Answer >>
  4. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  5. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  6. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>

You May Also Like

Trading Center

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!