Relative Strength as a Strategy

If you have good risk controls, and the ability to deal with lots of volatility, then relative strength has been a good strategy — regardless of market conditions:

"Over the very long term, covering multiple decades and including several major bull/bear cycles, no stock selection strategy beats Relative Strength (RS). This strategy is easy to understand: Buy and hold only the strongest stocks. When a stock slips enough so that it is no longer among the strongest, sell it and replace with whatever is the new strongest.

The RS strategy has been successful for a very long time. Samuel Eisenstadt, Research Chairman of Value Line Investment Survey, found that the top-ranked stocks by RS beat the Standard & Poor’s 500 Index by 4.5 to 1 over a 15-year test period. RS is an important component of Eisenstadt’s Value Line Ranking System. In another independent study, Charles D. Kirkpatrick II, CMT, found that the top-ranked RS stocks outperformed the indexes by 4.7 to 1 over a 17-year period. Many other studies have arrived at the same conclusion."

Apparently, it works just as well with ETFs:

Relative_strength

Colby’s column gives more details, along with his list of preferred ETFs. But he notes that:

"Because excessive speculation is inevitably followed by a return to reality, chasing RS fell out of favor for a few years after the top in March 2000. But the RS strategy is very much alive and well again since August 2004. Since August 2004, true to typical form, the strongest stocks have suffered large declines in minor market corrections, but they have been very quick to spring back to the top when the correction has run its course."

>

Source:
Applying the Relative Strength strategy to ETFs
Robert W. Colby, TradingEducation.com
Marketwatch, 4:12 PM ET May 25, 2006
http://www.marketwatch.com/News/Story/Story.aspx?guid=%7B734D0841%
2DADBF%2D49E2%2DA1F4%2D10BD51167B9F%7D&siteid=mktw&dist=

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