Since I started posting my research a few years ago I have received more and more questions about my Relative Strength Scans and how they are used. So this post is a brief overview of my process and how I use it. Feel free to take out of this what you can, but in the end, use the list in whatever way you can to generate the most profits in your investing.
Let’s start at the beginning. I found relative strength analysis early in my portfolio management career as I found sector rotation strategies to be the best way to tactically manage fund based portfolios at the time. This is where I started my journey; things have come a long way since those days. Today tactical based sector investing much more popular.
I started working with Relative Strength over a decade ago during my quest to move more fluidly among the sectors during a cycle and identify when one was likely ending. I started with the typical 12 month Relative Strength and realized quickly it didn’t work for my style. Through experimentation and a lot of studying other Relative Strength calculation methods, I settled in on a 3 month or 63 period relative strength with a front weighted structure. This means my relative strength calculation is much faster and weighted more to the near term price action than most others. This works well with my trading style. I prefer to enter soon after the start of a move and hold from a swing to short term position trade as long as the momentum is in my favor. The calculation is run on specific universes I design and can be sliced and diced in any way I want. The names are ranked from 99 to 0 when compared against each other. No outside influences in this calculation (many RS use comparison to an index as the basis).
As my research has expanded over the last couple of years, I have been focusing not only on the sectors, but on the universe of individual names and how they moved. Up until now, I only followed the top 10 holdings in the 19 sectors that I traded, which comes to 164 holdings when you weed out duplicates. These were the foundation for the best and worst scans I started all this with, which then expanded to the RS Movers posted nightly on Chart.ly back then and now on this website, and finally the weekly top down RS scans. Through multiple expansions of the list over the years it has been consistent and valuable in my process. Today it has increased to 29 Dow Jones Sectors/Industries that are the basis for many sector mutual funds as well as ETFs. This gives a large amount of segmentation over the traditional ten sectors
I took the top 15-20 in each of the 29 to get the total universe of 500 which make up the GT500 Index (yes, I am a car guy). I also took some liberties and added a few stocks into places even if they did not show in the index as some indexes were very thin. I tried to keep the holding larger and liquid so that they would be good examples of the sector flow. From these individual names, I run two scans. The weekly scan will show the best and worst RS in the universe for the week. Each week, the top 20 and bottom 20 RS scores will be on the RS scans post. Going forward, I will continue to highlight the new names on the list as before, but a new feature will be showing how many weeks the name has been on the respective list.
I also list those that dropped off the list each week at the bottom as those are often worth a look as well. The 26maRS column divides the price by the 26 week moving average to get the ratio in the column giving a different measure of internal relative strength.
The second scan is the RS Movers. This scan is run daily (most of the time) and consists of names that have seen their RS score move more than 25 points over the last 5 trading days. This is the list I study the most as it shows names that are moving “different” than the rest of the universe. I say different because the 25 point move could be due to the name moving or the rest of the universe moving and the name sitting still. Both have inherent value if you can identify them.
The movers list is split into the gainers and losers for the week, but please don’t make the mistake of looking at the gainers list for buys and losers list for shorts. It is not that type of relative strength. The short term nature of my RS can catch retracement moves, so be careful prejudging names on either list. These lists are to draw your attention to the chart; from there, it is up to you. I also do a movers list for the DJ Sectors, but on this list I look for a 20 point move over the last 5 trading days.
Of course, all of this work is done only after taking in a broader view of what is happening in the markets. A Macro view, if you will. I also analyze inter-market relationships through the lens of relative strength. Using key asset classes, I calculate the relative strength of the group. I like to keep this grouping very small to see the structural makeup of the important markets that compete for investment dollars.
What I mean by structure is where the groups like Equities, Commodities, Bonds and the Dollar are on the respective RS list. There are strong and weak structures we watch for over time.
Taking all these areas together helps me focus in the right places as we start each week as well as identifies opportunities each day that I can use in my daily prep. This can provide a constant flow of setups if you get in a rhythm or systematic way of scanning the lists.
I end every post reminding there are many ways to use relative strength. I have listed mine above, but I post these for idea generation. Take some time and study them for a few weeks and figure out how you can fit them into your trading style. Once you figure it out, l would like to hear your ideas.
Good Luck! It is there for you to make.
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(All market data above are derived from Stockcharts.com, Esignal, and Reutersdatalink)
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There is no guarantee that the views expressed in this communication will become reality. Investing in the stock market involves risk and potential loss of principal. Investment strategies should be thoroughly researched and understood before implementing and none of this should be construed as a recommendation.
