Index Fuel
One of the best short-term trades, and
an eye-opener for the intermediate-term trader, is the addition of a stock to
the S&P 500.
The S&P 500 is the most common
bogey of fund managers. Once a stock is added to the index, active managers take
notice, and index funds, of course, must take in account the new members’
weighting for their own asset deployment. TradingMarkets takes index
listings so seriously that co-founder Kevin Haggerty has created four
specialized screens to help you spot significant trading action in these S&P
500 and Nasdaq 100 stocks. For more, on that check out Kevin’s lesson, Trade Selection Using Four New TradingMarkets.com Screens
.
But I digress…
Late Friday, Standard & Poor’s
said Friday that staffing service Robert Half International
(
RHI |
Quote |
Chart |
News |
PowerRating) would
replace Associates First Capital
(
AFS |
Quote |
Chart |
News |
PowerRating) in the index. Associates First was
bought by Citigroup
(
C |
Quote |
Chart |
News |
PowerRating), the financial services colossus. As the following
chart shows, getting added to the widely tracked benchmark means a gusher of
additional liquidity as well as a short-term pop.Â
Robert Half shares closed up 1 7/8 to
31 7/8 on volume of nearly 21 million shares. The stock usually trades
977,000. Â
The top field of all
charts in this commentary uses a logarithmic price scale and displays a 50-day
price average in red. In cases where the displayed security has traded long
enough, the top field also will exhibit a 200-day moving price average in black.
In the second field, a blue relative strength line represents the displayed
security’s price performance relative to the S&P 500. The third field
displays vertical daily volume bars in black with a 50-day moving average in
blue for volume.
So much for the short-term pop. What
is there here for the intermediate-term trader? Well, for starters, if you’ve
been reading the commentaries of intermediate-termers of Kevin Marder, Gary
Kaltbaum and myself, you know that this is no market to be fooling around with.
The market remains in the grips of the worst bear on record since ’73-’74. There
are precious few high relative strength stocks forming sound bases. And while
some economic reports suggest increasing odds of a hard landing, the Federal
Reserve is still holding its foot on the brake pedal.
But while you sit largely or entirely
in cash, this is still a perfect time to identify the next leadership class.
Stocks that are holding up against the tide will reflect high 12 and six month
relative strength scores. Eventually, the market will bottom and give us a
confirmation rallies on strong volume. Your watch list of bear-resilient stocks
will furnish some of the next bull’s great winners.Â
It’s too early to tell whether Robert
Half will qualify for my own buy list when the bottom and rally come, but I like
some of the chart’s characteristics. The stock was in a major uptrend until
getting ahead of itself and topping on Oct. 9. Since then, shares have formed
the right side of a correction-recovery pattern and traded sideways, bouncing
nicely on the 200-day moving average, a sign of institutional entry.
Monday’s action pushed the stock above
its 50-day, an area of prior resistance. In a healthy stock, prior resistance,
once overcome, should become strong support. I’d like to see the stock
consolidate above the 50-day while the relative strength line closes in on its
Oct. 9 high (see Point A in the above
chart). I also insist that any prospective intermediate-term momentum stock
overcome its mid level, the half way point between the pre-correction peak and
subsequent low of the correction.Â
Remember that all stocks are
speculative and risky. On any trade, reduce your risk by limiting your position size to a percentage of your total
account and setting inviolable price stops. For an intro to combining stops with
position sizing, check out my lesson, Risky Business.
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