Relative strength investors had an excellent Q1 this year. In order to continue to generate returns from relative strength, discipline and patience are required. But news items and temporary issues can cause investors to take their eyes off the ball. As Zacks Investment Research put it:
Even though the market no longer seems to care about mundane things like earnings and revenues when there are such exciting things like a debt crisis in the cradle of democracy, this has been a very good earnings season.
In their recap of the current quarter’s earnings, Zacks goes into mind-numbing detail, sector by sector, for a large number of factors. Obviously they believe the market has been good because earnings have been good. When you examine the sector data, you will notice that quite a number of the strongest sectors in terms of relative strength are also sectors with really good earnings and positive estimate revisions.
Wow. What a shock! Sometimes when I read articles about relative strength or momentum, the writer makes it sound like a mindless exercise in buying whatever is going up, as if the stock or asset had no reason to appreciate other than group mania. But things typically don’t go up for no reason-keep in mind there’s always an informed investor on the other side of the trade too. If the fundamentals are strong, there’s often strong demand for the asset-and that’s usually where the relative strength comes from.
