V.10:5 (235-237): Calculating Relative Strength Of Stocks by Robert L. Hand Jr.

V.10:5 (235-237): Calculating Relative Strength Of Stocks by Robert L. Hand Jr.
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Calculating Relative Strength Of Stocks by Robert L. Hand Jr.

Heavy on consumer stocks? You may want to rethink your strategy and make some adjustments to your portfolio. Robert Hand addresses the shift of leadership early this year from consumer stocks to technology stocks, and how relative strength can identify emerging trends.

Bear markets come in two forms, the more visible form when all stocks decline below previous lows several times for a total drop from the highs of more than l5%. The less visible form of bear market is often referred to as a sector rotation and is less visible because the changes cannot be easily quoted in television news. Sector rotation occurs when there is a change in leadership of an industry group. The stocks of the old leaders, consumers, are falling in value while the stocks of the new leaders, technology, are rising in value. Sometimes, a function of a bear market is to effect such a change in leadership, but recently this sector rotation has taken effect even though the Standard & Poor's 500 is reaching new highs (Figure 1). You'd miss this sector change completely if you didn't use relative strength analysis.


Relative strength determines how much an individual stock has moved relative to the market as a whole, so it detects underperformance. The formula used to measure this (see sidebar, "Calculating relative strength") is:


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