Stock Selection and Market Timing
One of the most difficult aspects of investing in the stock market is selecting the best performing stocks. Sorting through the various recommendations made by the numerous newsletters and stock market advisory services available can be a tedious chore and leave many investors in a state of confusion.
Relative Strength Analysis is a technical analysis strategy to help investors sort through all the recommendations and to identify trends of individual stocks. When the upward trends of stocks are identified early enough, the stocks may be purchased and a profit may be realized by a continuance of the trend. Although past performance is not necessarily a determining factor in future performance of a stock, using Relative Strength Analysis for stock selection has proven to be a profitable strategy over time.
The Investor's Advantage provides a daily or weekly report of all of the stocks being tracked. The selected stocks are shown sorted strongest to weakest by a strength rating. This strength rating is calculated based on the price performance of each of the individual stocks. The more stocks that you track the better your chances of including the strongest stocks in your portfolio.
We've all heard the adage "Buy Low, Sell High". Without the proper tools it is very difficult to know what is high and what is low. A means of identifying tops and bottoms of the stock market movements is provided via the Daily Stock Market Barometer and the Weekly Stock Market Barometer. The Barometers indicate market sentiment, measuring the level of optimism and pessimism, using indicators such as the Advance/Decline line, the Put/Call Ratio and the Overbought/Oversold ratio.
When the market is Overbought and the Put/Call Ratio is low, the market is overly optimistic and the advance of stocks should slow down or reverse itself. This condition is indicative of a top in the market. It is not a good time to be purchasing stocks, however, it is a good time to sell stocks and sit out on the sidelines waiting for another buying opportunity.
When the market is Oversold and the Put/Call Ratio is high (a high number of puts are being traded relative to the number of calls being traded), the mood of the market is pessimistic and the decline should be ending. A rally should soon begin. This condition is indicative of a market bottom. Providing the longer term trend is in an upward direction, this presents a good opportunity to buy stocks.
Based on this strategy three sample portfolios were constructed based on the prices of the top ten stocks on the Relative Strength Report at periods when the market was in an oversold condition. A sample of 100 shares of each of the top ten plus commissions was used. As of February 20, 1987 the results of these selections are listed below.
Purchase Percent S&P500
Date Change vs Change
Portfolio # 1 08/04/86 +38% ; +21%
Portfolio # 2 09/13/86 +34% ; +23%
Portfolio # 3 12/26/86 +27% ; +15%
Incorporating these tools as a part of your overall investment strategy can provide you with superior returns on your investment capital. Buying stocks and forgetting about them until retirement is no longer a profitable approach to investing. Your portfolio is like a garden that must be tended. Weed out the underperformers and hold the strong stocks. When the stock's growth starts to slow or the market becomes overbought, it is time to reap your harvest and wait until the next buying opportunity to sow your investment capital.