What is relative strength? Why does it matter in growth stocks? Most importantly, how can this concept help investors make timely buys and sells?
All fair questions. Investing successfully is notoriously difficult. And to win at this money game consistently, you need knowledge, experience, a proven trading method and tons of discipline. Good data helps too.
That's why Investor's Business Daily came up with a revolutionary concept: Assign a relative strength score to every stock in IBD's database. In a strong market uptrend, focus primarily on those with high scores. A stock with real strength tends to stay strong longer, giving savvy investors more chances to make money.
Don't sit around and wait for companies with lagging action to play catch up. It could take months or years. Or even decades.
What Is Relative Strength? How To Measure It
Since the newspaper's founding in 1984, IBD has furnished readers with the Relative Strength Rating, going from 1 (the worst) to 99 (the best).
One rule of thumb: Prefer stocks with an RS Rating of 80 or higher. This condensed view focuses your precious time, effort and capital on companies that have outperformed at least 80% of the entire stock market over the past 12 months. A past IBD study of the most profitable stock market winners found the average RS Rating at the start of their rocket-like moves was a lofty 87.
Recently, IBD sister product MarketSmith introduced three-month and six-month RS ratings. These scores cover a stock's price action over the past quarter and half year, respectively. Why care? The bear market of 2022 has pounded growth stocks with a vengeance. 12-month RS ratings of many 2020 and 2021 market leaders have cratered into the 30s or even lower. But stocks that have rebounded more quickly are showing stronger 3-month RS scores.
Readers can view MarketSmith's 3- and 6-month ratings in the "Technical" section of a stock's "Related Information" sliding panel on the right edge of every chart.
How Do Your Stocks Rate Overall Vs. Their Peers? Use This X-Ray Tool
Compare Relative Strength Across Multiple Time Frames
If you see stocks with CAN SLIM attributes trade within 5% to 15% of their 52-week highs, you know they've done a lot of work building the right side of their bases. If the base stretches for a year or so, the 12-month RS Rating may still look sour. So, it's wise to check 3- and 6-month scores to see how they're faring in more recent price action.
Avoid using IBD's RS Rating as a primary sell signal. Your knowledge of key sell rules, based on chart action, takes precedence.
The Sell Trigger In This Energy Leader
Take APA for example. The large-cap oil exploration giant joined the strong run by energy stocks that began in late 2020. As the chart shows, APA blasted out of a nine-week cup at 31.24 in mid-January. In less than five months, the stock rallied 66% to a new high of 51.95.
A subtle topping signal appeared when APA made new highs in weak turnover (1) and reversed well off that week's high. When sellers crushed the stock in mid-June, APA's 12-month RS Rating still boasted an elevated score of 98. It didn't matter because the stock nose-dived almost 20% that week on heavy turnover. It closed the week ending June 17 sharply below the 10-week moving average (2), setting off a key sell signal.
How is the 12-month RS Rating now, as shares attempt to bottom out and seek institutional buying support near the 40-week moving average? Still a sky-high 95. However, the 6-month RS has shrunk to a 39 while the 3-month reeks at an 8.
Please follow Chung on Twitter: @saitochung and @IBD_DChung
