Breakouts Like These Can Lead To Exhilarating Gains
The stock market sends us signals all the time, but most traders/investors misinterpret them. For instance, the massive rally in April has several investors thinking much more positively about their stocks, trading strategy, and trading style. A rising stock market will make everyone believe that they are the next Warren Buffett. The truth of the matter, though, is that you'd better pay attention to relative strength.
Ever hear the Wall Street adage "a rising tide will lift all boats?" Well, that really applies to April 2026 thus far. Many areas of the market, especially growth stocks, are moving higher. But are they leading? If not, you might want to reconsider holding on. This upside move could be the perfect time to raise cash by selling some of those underperformers that are finally seeing a lift.
Within the consumer discretionary space, consider hotels ($DJUSLG) and restaurants & bars ($DJUSRU). Both have screamed higher in April, but only one group has my attention.
If you look at the recent rally, both industries would seem like they're improving equally. But a quick look at their relative strength vs. the S&P 500 shows two very different relative performance charts. Hotels are not only breaking out on an absolute basis, but they're also breaking out on a relative basis. Meanwhile, restaurants are charging higher and seemingly improving on their absolute chart, but check out the relative weakness: It's getting much, much worse!
This doesn't mean that restaurants won't be a solid investment in weeks and months to come. It's just that, right now, Wall Street is treating the group like a stepchild. The strong market is taking restaurants higher, not the other way around.
Earlier this week, in one of our Daily Market Reports to members, I indicated the absolute and relative strength in two smaller stocks, Bandwidth (BAND) and Netgear (NTGR). First of all, small-cap stocks continue to perform very well on a relative basis, but, if you can find individual stocks just making key breakouts, significant gains can be realized. Check out BAND and NTGR.
Bandwidth, Inc. (BAND)
NetGear, Inc. (NTGR)
Neither of these is a perfect setup, both having flaws. But when you catch a stock just making a breakout, it provides an opportunity to keep a fairly tight closing stop in place while potentially enjoying enormous upside. In the case of stocks like these, the breakout level is an important level to hold on a closing basis, though I prefer giving stocks like these a bit more room down to rising 20-day EMAs.
The one thing that both have in common is that their relative strength vs. their peer group is either soaring (BAND) or improving (NTGR). Once I buy into a stock like these two, I want to make sure the relative strength remains strong or continues to improve.
On Monday, in our FREE EB Digest newsletter, I'm providing a stock that just broke out on Friday that I love heading into next week. If you're not already a FREE EB Digest subscriber, CLICK THIS LINK, enter your name and email address, and I'll ship this potential winner to you on Monday!
Have a great weekend and happy trading!
Tom
