3 Factors That Can Help Determine If A Stock Will Outperform Or Underperform

Even in a bull market as relentless as the one we're currently in, it can still be hard to predict markets and time trades. For example, who could have predicted Amazon.com Inc AMZN would buy Whole Foods? Or that bitcoin would become the highest flyer of the year?

We can’t predict the future, but there are reliable indicators that we can use to hint at which stocks are due to go higher, and which are due to fall.

Marc Chaikin, co-founder of Chaikin Analytics and a 40-year veteran of Wall Street, breaks it down for us.

Strong Relative Strength

Relative strength measures the change in the price of a stock against the change in the price of something else, usually a market average like the S&P 500. This is important because it allows us to compare the recent activity of a stock against (or relative to) the overall market.

Relative strength is expressed as a number. A stock is said to have strong relative strength if it’s above one—that indicates the stock has outperformed the market. A relative strength below one indicates weakness relative to the overall market.

Strong Chaikin Money Flow

Chaikin Money Flow is an indicator Marc Chaikin developed to track institutional buying and selling activity, and to find out whether Wall Street’s biggest players are accumulating shares of a stock or selling it over a certain period (usually in the last 20 days).

“It’s a pattern that we call stealth accumulation and distribution because institutions are so large these days that they can’t execute their orders all in one day,” Chaikin said. “But they’re paranoid, they don’t want people to know what they’re doing. So they try to hide their tracks, but Chaikin Money Flow picks it up.”

Chaikin Money Flow is expressed as a number between -1 and 1. A stock with negative Chaikin Money Flow indicates institutions have been selling the stock, while positive money flow indicates they’ve been buying.

Sentiment Of The Overall Market

Sometimes, a stock’s performance can get caught up in overall market sentiment, even if it seems irrational. So every investor needs to have a feel for what the overall market is doing and how it relates to their portfolio, according to Chaikin.

As far as 2018 is concerned, Chaikin expects a similar story to 2017: rising interest rates and rising earnings.

“The question on everybody's mind is, ‘When are we going to get that pullback?’” he said. “I wish I could tell you I knew, but I don’t. But I do think we will see a pullback in 2018 of 5-10 percent”

However, he emphasized that pullbacks should not be seen as bad news.“Pullbacks are your friend,” Chaikin said. “And if you’re constantly looking for a bear market, you’re going to be missing a lot of opportunities.”

For more analysis on how to find outperforming stocks, Marc Chaikin is giving a webinar on Thursday, Dec. 21. You can sign up here.

Chaikin Analytics is an editorial partner of Benzinga