Spot Strong Performers Using RS Analysis

06/13/2012 3:00 pm EST


Thomas Aspray

, Professional Trader & Analyst

Relative performance, or RS analysis—not to be confused with RSI—is a valuable technical tool that can help traders identify leading and lagging sectors, explains Tom Aspray.

I’m here with Tom Aspray and we’re talking about relative performance analysis and how to use it. Tom, define that for us. What is it?

Some people refer to it as relative strength, but that’s always confusing, because they confuse it with Welles Wilder’s Relative Strength Index.

With relative performance, you generally take a ratio of a stock or another index to a benchmark such as the S&P 500. Now with all the sector ETFs, it’s a very important tool for determining which sectors are acting the best and the weakest.

For example, in 2011, if you looked at a plot of the relative performance analysis, you’ll see it was in a solid downtrend, making lower lows and lower highs, suggesting you shouldn’t be in the financials.

Conversely, it was very positive on energy in the first part of the year and energy was up really strongly. Of course, it turned negative in April and May, and then energy was an underperformer for the rest of the year.

Early in 2012, what were you looking at in terms of this?

Energy looked the best right. The consumer discretionary and consumer staples are still performing well. Utilities had their run, but longer term they still look good. But they’d sort of been out of favor because they are such a defensive group.

Healthcare is looking interesting. Energy normally bottoms in February, and so it looks really good, and in early February, the relative performance analysis on the Select Sector SPDR - Energy (XLE) turned positive.

All right, are you using this for ETFs in the sector, or do you then go find a good a stock within that sector?

Both. I tend to make recommendations in the sector, but more importantly, I look within the various industry groups that make up that sector.

For example, if you look at the oil and gas drillers, you can compare their relative performance against the broader energy sector and find out which industry group within the energy sector is doing the best.

Finally, time frame wise, this probably works great on longer time frames, but what if I’m a weekly trader or even intraday trading?

It still works well because normally those would be the stars, and the last couple years, the cycles have been shorter. Often times, you’d see a cycle that would last six to eight months, and some of these energy things now only last three or four months.

So it’s really good when you know which the strong sectors are because then you can concentrate on those stocks, and you’ll probably have the best performers in the market.

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