STRATEGIES

In a year that saw stunning underperformance by some big-name stocks and had many surprise winners, one indicator proved most useful for buying strength and avoiding big losers.

No matter what happens in the last few days of the trading year, it has been an especially rough one for stock investors. While the S&P 500 is still down for the year, the Dow Industrials are actually up almost 5% (at time of writing).

So how could investors have known to be in the SPDR Diamond Trust (DIA), which tracks the Dow, instead of the Spyder Trust (SPY), which tracks the S&P 500?

In addition, buying the big US or foreign money center banks was also a horrible idea in 2011, with Bank of America (BAC) down 57% so far for the year. But there were some bright spots, including McDonald’s (MCD), up 29.7%, or Southern Co. (SO), which was up 13.7% in the last half of the year, not including dividends (SO yields 4.1%).

There was one indicator that could have helped investors to avoid the losers and spot the winners: the relative performance, or RS analysis. These examples will show why.

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The Select Sector SPDR - Financial (XLF) is down just over 19% so far this year, as it peaked at $17.20 in the middle of February.

  • XLF closed below the weekly uptrend, line a, in early June, which was a negative sign
  • The weekly RS line started forming lower lows in 2010, and another new short-term downtrend began in early March (line 1)
  • The RS shows a long-term downtrend (line b), and for the most part, it has stayed below its declining weighted moving average (WMA)
  • The RS needs to move above resistance at line c to suggest it is bottoming

Goldman Sachs (GS) has fared even worse this year, as it is down 45.7% after peaking in January at $175.34. It was selected in May as one of “The 4 Worst Bank Stocks.”

  • GS had a low at $84.20 recently and has come close to testing the lows this week
  • The weekly chart shows that its uptrend, line d, was violated in the middle of April
  • The RS line broke support, line e, on January 22 (line 2) and has since been in a well-established downtrend. It has stayed below its weighted moving average
  • Though the chart is trying to form a double-bottom formation, this is not supported by the RS analysis
  • GS needs to move above the prior weekly high at $118 to signal a new uptrend has begun

NEXT: How RS Analysis Spotted the Year’s Big Winners

Tickers Mentioned: Tickers: XLF, GS, MCD, SO