Weekly Wire – It’s all relative strength
So far, 2015 is the year of the yawn as far as the markets go. Record low volatility and a very narrow trading range in the US stock markets make it pretty quiet on the portfolio front. So how does an investor know what is a good idea to own vs. what is not so hot?
If you are a client of ours, or have ever come to one of our workshops, you have heard us use the term Relative Strength. Relative Strength is an indicator that we use that measures how an investment / sector / market is performing relative to others over time. Because the comparison is on a relative basis, it allows for the comparison of dissimilarly priced investments.
An easy example would be comparing two stocks – one starting at $10 per share, the other starting at $100 per share. Over a given period, the $10 stock increases to $20 per share, while the $100 stock increases to $150 per share. In relative terms the one that went to $20 is ranked higher than the one that went to $150, because on a percentage basis, it had a larger increase over the same period of time.
Although the analysis over time of a Relative Strength ranking chart can be somewhat complex, the basic theory is not hard to understand:
It is generally better to own things that are ranked highly against their peers.
Relative Strength rankings are helpful to show which markets or sectors are doing better than others, and then can be used to rank investments within those markets or sectors to see which specific securities are outpacing the competition.
Learn more about Relative Strength on Investopedia here: