Put Relative Strength on Your Side

02/20/2012 8:30 am EST

Focus: STOCKS

Linda Raschke

President, LBRGroup, Inc.

LBR Group’s Linda Raschke discusses some of the methods she uses to pinpoint, qualify, and trade the strongest-performing stocks in these or any market conditions.

We’re talking about using relative strength on stocks to find good opportunities with Linda Raschke. So Linda, how do you use relative strength when it comes to individual stocks?

Well, first of all, relative strength is never your primary timing indicator. As a technician, you would want to use other market tools to determine whether the market overall was a buy or a sell, and then we’ll go down to the relative strength work so that we can get a little bit better beta in our vehicle for purchase.

Both with longer term portfolios, ETFs, or anything, you want to play this game where you are purchasing the relative-strength vehicle.

We use it both on an intraday basis in looking for the stocks which are bid up best off their opening price in the morning, and for longer-term positioning.

Let me just give you an example that we had in September and October right when we were coming off those lows. You would want to go down and look at the stocks that made higher lows—obviously, instead of the lower lows—and then the shares that performed the best to the upside on that rally, even shares like Walmart (WMT), which made all-time highs, were the ones that made a higher low on that retest. 

So again, start with the basic technical indicators, market sentiment, or whatever you’re going to use for your overall timing, and then go down to the individual issues which are outperforming the S&P. That’s one way to look at it.

Now, the second question is how do you measure the relative strength or whether it’s outperforming? That’s going to depend on your look-back window.

Obviously, if I ask which shares have done best in the last two weeks, I’ll get an entirely different universe than the shares that have done best over the past two months, so what I like to do is time what has done best off of that recent low that we made in the S&P.

I’ll use that as my look-back date and then I’ll simply divide out the particular individual issue by the S&P 500 index and I’ll see which are outperforming the S&P 500 index over the next two days, or six days, or two weeks, whatever it is. Those are the ones that you want to own for the intermediate-term rally up, and vice versa to the downside.

Alright, so are you always finding the strongest and going long and finding the weakest and going short simultaneously?

No. It’s not pairs trading and it’s not trading market neutral. It’s more of when you see an opportunity that has a directional basis, what do you want to use as your vehicle?

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