It’s easy to find hot stocks in a hot market because a rising tide lifts all ships. It’s much harder to find hot stocks when the market for the S&P 500 is tepid because investors and their money are more cautious. In this scenario, stocks will generally move sideways within a trading range but this is not true of all issues. There are good stocks and bad stocks for all market conditions, it just takes a little work to root out the truffles from the trash. Today we’re looking at three ways to find hot stocks in a tepid market that work well on an individual basis and very well in conjunction with each other.
The Market Is Driven By The Sell-Side
Underlying bid or not, the volatility of the market is driven more by the sell-side than not and that means paying attention to institutional trends can be key to investing success. A stock with high institutional ownership is usually less volatile than other stocks because of the buy-and-hold mentality taken by this group of investors. Stocks with a rising or falling institutional interest often trend in the direction of the institutional sentiment and changes in their purchasing habits can be a signal the market will bottom, top, or reverse course. And this is true for insider buying as well.
Occidental Petroleum (NYSE:OXY) has a high and rising institutional ownership but high-profile buy-and-hold investor Warren Buffet is behind the movement. Mr. Buffet and Berkshire Hathaway (NYSE:BRKa) have bought a little more than 20% of the stock over the last 6 months and it was recently approved to purchase up to 50% of the company. That news has the shares up more than 10% from recent support and on track to trend higher over the next few quarters.
The Analysts Can Drive Stock Prices Too …
Analysts are another powerful force that can drive the market. When one analyst upgrades or downgrades a stock it can move the needle in regard to price action. When a dozen or more downgrade or upgrade a stock, or if a trend in sentiment develops, it can drive large, sustained moves in the stock’s price.
In late August Walmart (NYSE:WMT) was the most upgraded stock in the last 30-days and the second most upgraded stock in the last 90-days which makes it a high probability candidate for upward price movement. A closer look at Walmart’s analyst activity, however, will show the sentiment of Moderate Buy slipped over the last year as did the price target. The Marketbeat.com consensus price target is down in the 30, 90, and 365-day comparisons which is putting some downward pressure on the price action despite the recent firming in sentiment.
Volume Is What Sustains A Market Movement
Tepid markets are often volatile because they are less liquid than hot markets. Volume is one of the first signals any trader learns about and volume is what brings liquidity. The volume chart of OXY shows trading volume picked up substantially with the onset of Berkshire Hathaway’s buying spree and has remained at those high levels ever since. Walmart, on the other hand, has had no pick up in trading volume and the volume could even be said to confirm resistance at $140 if not downward movement.
