PowerRatings Danger Zone: RFMD, DIVX, LOOP, MTZ, SNDK

Market breadth is a favorite measurement for many stock traders. But PowerRatings market breadth might be even better.

Most stock traders who have been around the block a time or two know that while it is good to know whether or not the markets ended the day up or not, knowing the breadth of the market – how many stocks were closing higher compared to the number of shares closing lower – often tells a truer tale of how strong or not-so-strong a given market is.

But there’s another type of market breadth I like to consult from time to time. Specifically, I like to look at the number of weak stocks that are moving dramatically higher compared to the number of strong stocks that are moving dramatically lower.

In the first case, I am getting a gauge of how dangerously overbought the markets are. Strong stocks moving higher tells us one thing. But when the number of weak stocks, (stocks trading below their 200-day moving averages) that are moving dramatically higher begins to grow, I know that the potential for a reversal is similarly growing.

Weak stocks, by definition, tend to move lower. So when weak stocks begin moving higher, my first reaction is suspicion. Not only are these not stocks to buy, but also there are often stocks that traders can profitably bet against.

On the other hand, I also want to keep track of how many strong stocks, stocks trading above their 200-day moving averages, are moving lower or pulling back. Because I always want to be buying strong stocks and want to buy them as the lowest prices possible, seeing a large number of strong stocks pulling back – particularly when that number is large relative to the number of weak stocks rising – I develop a bullish attitude towards the market and begin focusing more on opportunities to the long side.

Every day I check two lists. One is a list of low Short Term PowerRatings stocks that have moved UP by 10% or more in the past five days. All of these low Short Term PowerRatings stocks do not only have low Short Term PowerRatings, but also they are all trading below their 200-day moving averages. One glance at this list and I can tell if the market is more likely to pull back or bounce in the near term.

The other list, of course, is a list of high Short Term PowerRatings stocks that have moved DOWN by 10% or more in the past five days. All of these high Short Term PowerRatings stocks have closed above their 200-day moving averages, marking them as stronger stocks. If I consult this list and notice a large number of stocks with Short Term PowerRatings of 8, 9, and 10, then I know we have a stock market that is overextended to the downside, dragging good stocks down with it – but likely not for long.

All five stocks in today’s report fall into the former category of low Short Term PowerRatings stocks that have moved, arguably, too far too fast. With their Short Term PowerRatings of 1, we know that these are the types of stocks that have historically underperformed the average stock by a margin of nearly 5 to 1 after five days. These are the stocks to avoid if you are a long trader, or to sell short on any intraday strength.

RF Micro Devices (RFMD | Quote | Chart | News | PowerRating) Short Term PowerRating 1. RSI(2): 98.43 (from 97.57 on Thursday)

Divx Inc. (DIVX | Quote | Chart | News | PowerRating) Short Term PowerRating 1. RSI(2): 60.84 (from 97.39 on Thursday)

Loopnet Inc. (LOOP | Quote | Chart | News | PowerRating) Short Term PowerRating 1. RSI(2): 97.27 (from 96.97 on Thursday)

Mastec Inc. (MTZ | Quote | Chart | News | PowerRating) Short Term PowerRating 1. RSI(2): 51.96 (from 98.33 on Thursday)

Sandisk Corporation (SNDK | Quote | Chart | News | PowerRating) Short Term PowerRating 1. RSI(2): 64.71 (from 99.54 on Thursday)