Relative Strength is a Powerful Tool

Relative strength, or RS, is the most powerful indicator I have studied throughout my investing career. Not to be confused with the Relative Strength Index (RSI), raw relative strength (the one I use) is a price-based analysis used by market technicians and traders to evaluate a stock’s price performance versus the performance of a benchmark such as the S&P 500 Index, an industry group, or an underlying commodity.

Down Markets = Opportunity

RS is best taught through metaphor. Imagine two groups of swimmers – one group is swimming with the tide of the ocean, and another against it. All else being equal, the swimmers swimming with the tide swim faster. However, picture that in the group swimming against the tide is Olympic gold medal record winner Michael Phelps.

Back to investing, think of the tide as the general market direction. Roughly 75% of stocks follow the general market’s direction. In other words, if the Nasdaq and S&P 500 are down 1%, most stocks on your watchlist will likely be down. Here’s where amateur traders go wrong. On down days, rather than paying attention to the market, they get frustrated and may even step away from their screens out of frustration.  However, down markets are precisely when they should pay attention. During a down market, you want to build your “Michael Phelps” watchlist, that is, stocks that are bucking the market downtrend. If a stock can swim against a down tide, it will likely outperform dramatically once the tide swings back in its direction (the market goes up).

3 RS Stocks to Watch

As I mentioned earlier, RS can be a powerful indicator by itself. However, when combined with strong industry trends, chart patterns, and bullish catalysts, RS can be even more robust. Below are three stocks exhibiting RS:

IREN: Riding the Crypto and AI Waves

Zacks Rank #2 (Buy) stock IREN Limited (IREN) runs institutional-grade data centers off of power generated by renewable energy sources.IREN concentrates on locations with low cost and abundant supply of renewable energy sources. Their facilities are built to support power-dense applications like Bitcoin mining and AI data centers.

IREN enjoys two significant catalysts:

1.       AI Buildout: Companies like Alphabet (GOOGL) and Microsoft (MSFT) are exhibiting no signs of slowing down their CAPEX spending to buildout their AI offerings. Remember, data centers require an exorbitant amount of power.

2.       Bitcoin Seasonality/Reserve: February is among the strongest times of year for Bitcoin.Meanwhile, the Trump administration “Crypto Czar” said his team is working on exploring a “Bitcoin Reserve” for the United States – a massive bullish catalyst.

Despite a red market, IREN shares rose more than 5% Friday and are carving out the right side of a double-bottom base structure.

Image Source: TradingView

SERV: Delivery Robots are the Future

In cities like Miami (where I reside), if you walk down the street for more than 15 minutes, you will casually run into small Serve Robotics (SERV) robots delivering food. Serve “Develops advanced, AI-powered, low-emissions sidewalk delivery robots that endeavor to make delivery sustainable and economical. Spun off from Uber (UBER) in 2021 as an independent company, Serve has completed tens of thousands of deliveries for enterprise partners such as Uber Eats and 7-Eleven.”

SERV has parlayed its history with Uber into a pact with Shake Shack (SHAK) and Uber Eats to deliver food. What SERV has accomplished is genuinely disruptive. Instead of paying a courier to deliver food, a small four-wheeled box autonomously drives to your apartment and waits outside until you go to retrieve your food. Not only is the technology more cost-effective, it’s also far more efficient. As the food is on the way from the restaurant, you receive notifications on your Uber app telling you how far away the robot is. When the robot arrives, simply type in a passcode to unlock the box and retrieve your food.  The two analysts that track SERV expect earnings to jump 51.35% next quarter and 38.01% for full-year 2025.

Chart-wise, the stock bounced off its 10-week moving average and delivered a bullish engulfing candle.

Image Source: Tradin

You can read more about the robotics industry here.

FUTU: A Dominant Fintech Name

Futu Holdings (FUTU) is a Chinese fintech company that operates in Asia. Futu is a full-service broker that offers stocks, ETFs, and bonds. The company also provides educational content, real-time market news, and an extensive trading community. Quarterly earnings show momentum as they jumped 21% year-over-year in the last reported quarter. Friday, shares jumped more than 5% as volume swelled to 148% above average. FUTU shares are carving out a monthly bull flag pattern.

Image Source: TradingView

Bottom Line

While amateur investors often tune out during red markets, savvy investors understand the power of searching for relative strength and stocks bucking the weakness. IREN, SERV, & FUTU are three such stocks.

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Microsoft Corporation (MSFT) : Free Stock Analysis Report

Alphabet Inc. (GOOGL) : Free Stock Analysis Report

Serve Robotics Inc. (SERV) : Free Stock Analysis Report

Shake Shack, Inc. (SHAK) : Free Stock Analysis Report

Uber Technologies, Inc. (UBER) : Free Stock Analysis Report

Futu Holdings Limited Sponsored ADR (FUTU) : Free Stock Analysis Report

IREN Limited (IREN) : Free Stock Analysis Report

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