“Every big idea that works is marked by simplicity, by clarity. You can understand it when you hear it, and you can explain it to people.” —Peggy Noonan, Wall Street Journal
Relative strength investing is just such an idea that works, is marked by clarity, and can be easily explained.
Most investors find investing to be incredibly complex. For an experiment, ask 10 investors what makes a stock go up or down and observe the disparity in responses. Some may say that it is the earnings of the company that determine the stock price. Other responses may focus on the perceived value of the company, a good story of the company’s prospects, market psychology, the overall health of the economy, availability and cost of money, fads, pronouncements of the President or Chairman of the Fed, analyst ratings, share buybacks, dividends, mergers and acquisitions, or speculation of the price itself.
Without minimizing the influence of any of these factors, a technician looks at the bigger picture to conclude that stock prices change every day and over time because of all of these reasons and more. In any given period, buyers and sellers of securities will be influenced more by some factors than others. The culmination of all of the factors influencing the buying and selling decisions of investors tends to cause prices to move in trends– often multi-year trends. Relative strength simply provides a framework for ranking securities by the strength of those trends and investing in the strongest of those trends.
