Don’t Get Stuck with Lagging Stocks

04/12/2011 3:00 pm EST

Focus: STOCKS

Joseph Fahmy

Managing Director, Zor Capital, LLC

It's frustrating to be long a stock that's not following the market's trend higher, and Joe Fahmy explains that he uses relative weakness to identify these laggards and get out early.

Joining me in the MoneyShow.com video network studio is Joe Fahmy. Joe, I know you look at relative strength, but is there a way that you can use relative weakness to profit?

Yeah, absolutely, that's a very good question. I spoke recently at the New York Traders Expo about how I like to look when the market is correcting for stocks that are holding up well. 

When the market resumes its uptrend, I'm looking for stocks that are also going to hopefully go higher. I'm increasing my chances that they're going to go higher.

One thing I noticed…the flip of relative strength is relative weakness. What I mean specifically is when the market is going higher and the stocks aren't moving with it. I've given talks before where I ask people, I say, "Have you ever bought a stock and the market is running like crazy and your stock isn't moving?" Everyone sits there and they say, yep, that's right, and they get frustrated. 

So one of the best traders that I follow, Paul Tudor Jones, he says when something is bothering you that much, just get rid of it.

So I use relative weakness, meaning when the market is going higher and my stocks aren't moving, I'm being patient with them. But when they're not moving, it's usually a sign, okay, if the wind is at your back and it's pushing the market forward and your stocks aren't moving, it's usually a good sign to think about selling the stock.

Are there any other indicators that you look at to give confirmation to your strategies?

Mostly price and volume. I'm not a big fan of all these indicators that people have on their chart because the price is what creates those indicators. 

So I would like to think I'm a little old school, just price and volume. I don't look at MACD. I don't look at all these different indicators that a lot of people look at. 

I just want to know what the big boys are doing because the big mutual funds and pension funds and hedge funds, they're not buying a hundred or a thousand shares as your beginner or average trader is. They're buying hundreds of thousands if not millions of shares. So that shows up on the tape. They can't hide their hand.

So I'm mainly looking at volume and I'm also looking at price action.

Joe, you mention that these big institutional traders that move lots of shares can't hide, it shows up in the tape. The advent of this computerized trading that gave us the flash crash of last May, does that put the individual trader at a disadvantage?

That's a very good question. I haven't noticed a big difference.

I know that there are a lot of computerized programs that the institutions run, but at the end of the day, if the individuals are looking for good growth companies with strong earnings and sales, for the most part, the institutions are backing them whether it's computerized or they're calling in orders.

But I haven't noticed a difference that it's affected the individual trader.

Don't fight the tape is the bottom line on that one.

That's true.

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