Systematic Relative Strength

One of the benefits of relative strength is its ability to drill down and find those dynamic stocks that are thriving even in the midst of lackluster broad market action. One such stock is Salesforce.com (CRM), which is also one of our current holdings. Over the last 12 months, CRM is +109% while the S&P 500 is only +4%. That kind of relative performance is attractive to us, so CRM was purchased in some of our account styles early in the summer. The recent earnings report, which was stronger than expected, supports the thesis that often stocks with powerful relative strength characteristics are strong because the underlying fundamentals are strong. (Not every stock works out this well, of course, but it’s nice to see that even in a difficult market environment, some companies can perform well.)

Source: StockCharts.com

Click here to watch a fascinating interview with Jim Cramer and Salesforce.com’s CEO Mark Benioff. This interview took place August 23, 2010.

Salesforce.com is a current holding of Dorsey Wright Money Management. Past performance is no guarantee of future returns. A list of all holdings over the previous 12 months is available upon request.

The chart below is the spread between the relative strength leaders and relative strength laggards (universe of mid and large cap stocks). When the chart is rising, relative strength leaders are performing better than relative strength laggards. As of 8/23/2010:

The waiting game continues. The RS Spread has been flat since August 2009. As we have pointed out before, RS leaders have performed much better than RS laggards over time and we expect that trend to continue. However, for the time being, RS leaders and RS laggards continue to generate similar performance.