(By Rich Bieglmeier) Earlier today, we wrote about an ETF trading strategy
that you can use to battle the recent stock market blues. Using our sector performance analysis
, iStock provided the cliff notes version of a buying and shorting exchange-traded-funds with the hope of profiting from the difference in performance.
In this article, we are going to take the next step, combining our sector scorecard and relative strength to use equities instead of ETFs.
Our first step is to determine the constituents of the emerging bull subsectors of Medical Supplies and Trucking, and from the emerging bear groups of home improvement and computer services, and input the tickers into the stock screener.
From within the buy camp, investors want to identify the stocks with an oversold reading. To do this, we scan for companies with the lowest Relative Strength reading (RSI). Typically, a score around 30 means the stock could be ready to rebound.
iStock pinpointed four possible candidates:
Knight Transportation Inc.
) 34.35 RSIMarten Transport Ltd.
) 30.41 RSISwift Transportation Company
) 32.28 RSIVitran Corp Inc.
) 25.61 RSI
Sooner or later, each member of the quarter should bounce higher or hold steady while everything else around them fall. Plus, the sector chart says that outperformance is a possibility in the weeks ahead.
No investor wants to buy for buying sake; there is no need to own junk. iStock finds Marten Transport Ltd.
) offers the most attractive package of fundamental valuations
; therefore, we will make the provider of freight surface transportation and related supply chain services in Canada and the United States our purchase.
For the other side of the RSI pair trade
, iStock will focus on the names with relative strength readings in the 70 neighborhood. That's the level where equities are considered overbought. In English, it means the stock is ready for some profit taking.
A trio made the list, all from the emerging bear member, computer services.
CACI International Inc.
) 69.64 RSIThe KEYW Holding Corporation
) 68.13 RSINCI, Inc.
) 71.14 RSI
As usual and necessary, we recommend reviewing the basic, fundamental valuations to see which is the most overpriced. For us, it is The KEYW Holding Corporation (KEYW).
Investors might buy $10,000 of MRTN and sell $10,000 of KEYW short to execute the trading strategy. If our sector analysis is correct, and the RSI readings head towards 50 on both sides, then this technique should provide profits no matter what the stock market does.
Traders might consider closing the position when one or both of the companies reaches a relative strength reading of 50.