Absolute performance views price in a vacuum. For example, XYZ is up 50% this year; thus, its absolute performance is strong.

Relative performance is a metric of comparisons. It views asset movement, not in isolation, but relative to something else.

For instance, suppose the S&P 500 is up 60% this year. Compared to that, the XYZ rise of 50% doesn’t look as good. XYZ, then, is exhibiting relative weakness. You could also say it’s “underperforming.”

Relative strength is sometimes hard to see in a bull market. When everything is rising, it seems like all stocks are healthy. But when markets are crumbling, strength becomes obvious. Take today, for instance. Equity indexes are getting slammed across the board. Small-caps have been especially hard hit, dropping 4%.

And yet, amid a sea of blood, I’m still finding pockets of green. Spotting relative strength is as easy as sorting your watchlist by percentage change. The tickers that are gaining today are all prime examples of relative strength.

Their leadership may not have been obvious on up days, but it’s sure as heck in your face today. Roku, Zoom, Peloton, Crowdstrike, Okta, Square, Paypal, and Advanced Micro Devices all find themselves atop the leaderboard. The lot of them are rising 3%+ on a day when a broad swath of the market is sinking.

As Warren Buffett said,

“Only when the tide goes out do you discover who’s been swimming naked.”

The Oracle of Omaha

Today’s stalwarts still have their shorts on. Investors are clinging to these darlings even as they flee the nudists.

So what’s the play?

If you believe that strength begets strength, then today’s leadership should be rewarded with your attention, and potentially future affection. In my experience, stocks that hold firm while the market is melting down tend to lead when the selling pressure finally abates.

Is Tech Back to Leading?

You’ll recall the Nasdaq has been at the heart of all that ails the market. But not today! Tech has gotten its mojo back. The Nasdaq is down less than 1% while small-caps are down 4%! Did you notice that every leader mentioned above is in the tech sector? It speaks to the sudden shift back to tech. The laggard has once again become a leader.

Perhaps it’s a one-off, and tech’s weakness will return tomorrow. As always, we’ll take it one day at a time. I’m choosing to view the relative strength with optimism. Perhaps shareholders are less willing to part with their shares now that prices have already been slashed 15% to 30%.

Take Apple, for instance. Its down gap was swiftly bought up, and it’s back to unchanged on the day. At Monday’s lows, it was already 25% off the highs. Perhaps that’s enough bloodletting for now.

As always, when bottom fishing or fading fear, my strategy of choice is the bull put spreads. Today’s VIX spike re-inflated premiums, thus hiking paydays for credit spread traders.

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