The Relative Strength Ratio-Macd Crossover by Gilbert Raff
Here's an indicator to identify positive and negative trading signals for stocks and mutual funds. The heart of the indicator involves applying an oscillator to the relative strength line. Trading signals result from identifying strong relative strength, which is a positive indication, while weak relative strength is considered a negative sign. Here's how to lower the volatility of returns by applying the popular moving average convergence/divergence (MACD).
Most stocks and mutual funds are more volatile than the Standard & Poor's 500 index. The first two quarters of 1994 amply demonstrated this, with most equity mutual funds losing more than the stock indices, and most bond funds losing more than the Shearson Lehman bond index. In what may seem like a paradox, I have used in my financial management practice an indicator based on the relatively greater volatility of stocks and mutual funds to produce less volatile investment returns. I call it the relative strength ratio-MACD crossover indicator.
Let me illustrate this first in mutual funds. The first step is to divide the weekly close of the mutual fund in question by the weekly close of the S&P 500 index, and you'll have a graph of the relative strength ratio of that fund. I use this term to distinguish this ratio from the similarly named but completely different relative strength indicator (RSI). When the ratio is falling, the fund is underperforming the S&P index, and vice versa.
Next, apply the classic moving average convergence/divergence (MACD) indicator to this graph. When the MACD is over its nine-week exponential moving average (EMA), called the trigger line, buy the mutual fund. When the MACD is below the trigger line, move into a money market fund if you are conservative or into a higher-performing fund if you are aggressive.