Underperforming And Outperforming Stocks
Hello traders. Welcome to the stock trading course and the second module, stock market indices. In this lesson, we are going to put everything together and we are going to learn how to use stock market indices to find under-performing and out-performing stocks. Now, let’s first start by defining what are under-performing and out-performing stocks stands for. The performance stock indices are an excellent tool to track market trends and overall sentiment. The indices are the only tool we have that provides a historical perspective to a market. But as stock traders, we have an additional use for these indices. We are going to use them to analyze stocks that will perform and give us better profit from our investment.
So, let’s start by going through what under-performing stocks mean. This term is used when a stock is doing worst than the market return, or the benchmark that we are comparing the stock to. For example, when a stock has returned 5% over a period of time and the market has return 12% over the same period of time, this stock is said to have underperformed the market. We are going to use this comparison to filter out stocks that will not have a good return on our investment.
On the other side, there’s over performing stocks. This term is used when a stock is doing better than the market, or the benchmark that we are comparing the stock to. For example, when a stock that has return 18% over a period of time but the market has only return 12%, this stock has outperformed the market. We are going to use these comparisons to find stocks that will have a better expected return for our investment. And of course these comparisons can be done, or have to be done on a daily basis if you are day trading, but we are going to go through how to use stock market indices in a day trading on the day trading module.
Now, which indices are we going to use to compare the stocks we analyzed? When we are trading tech stocks, we are going to use the NASDAQ Composite Index. When we’re trading other stocks, we are going to look at the S&P 500. And if we are trading Blue Chips, we are going to use the Dow.
Now, let’s go to the charts, and I’m going to show you how to compare a stock performance to the benchmark. So, here we have the Apple chart. And as you can see, we are in a daily chart and we have five years worth of data on it. But what we’re going to do is, because Apple has so much weight in the indices and on the NASDAQ, that the performance of this will be very similar to the performance of the stock. So, what we’re going to do is we’re going to go to the Heat Map, and we are going to go to the NASDAQ 100 for example, and we are going to choose a stock, an information technology stock that is not as big as Apple. Because take a look at how big Apple is in relation of the other stocks inside of the information technology on the NASDAQ.
So, let’s go. We can go with CISCO, maybe with EA, Electronic Arts, Texas Instrument. We can go with QCOM. Okay, let’s go with QCOM. So, let’s go back to the charts, and let’s load the QCOM chart. Right there. And as you can see, well, this stock has been on a very down, well, on a very strong down movement since it’s high at 8197. And we want to know how the stock is performing in comparison with the NASDAQ. What we are going to do is we’re going to go to studies and we are going to add a study, or compare it with the NASDAQ Composite Index.
Now, you can see that this stock from June or July, this will be 2012 I think, was outperforming the NASDAQ? You can see the performance of the NASDAQ here at the purple line, and you can see the performance of these stocks. So, when the stock was over performing the NASDAQ, it was a good place to make some long trades. For example, when we retrace back to these highs, you can see that we retraced back to the 6715 level, and then we made a high of 8197 level. This is a very nice $16-$17 move when this stock was over performing the NASDAQ. But then, you can see that we have some very bad earnings report right here, and right here, and right here which made the stock to start in a very, very strong down movement to the low 50s, and starting to under-perform the NASDAQ.
Now, when the stock was under-performing the NASDAQ, it wasn’t a very good idea to go long on QCOM. Now, this is how it’s going to work. Stocks that are out-performing the indices are good investment vehicle for your money, and when they are not they are not a good investment vehicle. Well, there’s a lot of liquidity, in this stock you could have actually shorted the stock when, for example, this triangle broke. And you know to short the stock because it’s under-performing this index.
Now, let’s try another stock for example. Let’s go with Amazon, a stock that is more commonly traded by day traders. Now, you can see that right here, the stock was under-performing the NASDAQ. But then again, we made a triple bottom, we were under-performing the NASDAQ. But we got a positive earnings report. Right here, you can see the gap. The earnings report was 45¢ per share when we were expecting a negative or a loss per share on this earnings report. We did not, and we started to gap up.
Now, there’s another way to use benchmarks or indices in your trading. This stock was under-performing the NASDAQ. Well, this is Amazon, so we are going to use the S&P 500 for this example. Let’s compare with the S&P 500 which is this one right here. Now, this stock was under-performing the S&P 500 as you can see right here, but because we had such a positive earnings report, and of course we are going to learn how to trade earnings report in the day trading and mid-term trading module, but this just an example.
We had a good earnings call, we broke with this arranged market right here from… Well, we broke with this high, which means that we were no longer in a rangy market. Of course, we made a triple bottom at the 285 level, and we started to trade up. But we are under-performing, or Amazon was under-performing the S&P 500. This means that because the stock was under-performing the S&P 500 when all of this happened, it means that this stock is actually undervalued and right here was a good place to buy the stock for a rally to the natural flow of the market. And you can see it right here was a rally from this low at 287 to the 580 high, that was a rally of almost 300 points.
Now, stocks that are out-performing are good for short term, long opportunities. Stocks that are under-performing are good for short term, short opportunities and as investment vehicle stocks that are under-performing the benchmark, but start to look good on a fundamental basis are good for long opportunities.