Actually, I don’t even know what part it is anymore. We’ve written numerous times about relative strength’s reliance on price, and why price is such an important input. This graphic, courtesy of Bespoke Investment Group, tells a great story. There are two lines on the chart, one for price and one for analysts’ consensus earnings estimate. Price is dropping rapidly. The consensus estimate is moving down very grudgingly—until earnings are reported, when it plummets. Now the analysts have figured out what price knew all along.
Source: Bespoke Investment Group
This is one of the best graphics ever to illustrate how price often anticipates fundamental developments. The particular example here shows an earnings miss, but price is often anticipatory on the upside as well. When you sort out stocks by relative strength, it becomes very apparent that they are typically strong because they have superior fundamentals.
