Licencia por Enfermedad A. Normas Generales

There are other useful applications for this tool. Many investors like to use relative strength to find the areas that are attract- ing the new money flow. In Figure 11-3 we compare a Big Cap Index to a Small Cap Index. Within the equity market there are many subdivisions that you need to explore for opportunities. Another wonderful benefit of the PC is how it has given us the power to compare these various “styles” of investments. As far as I am aware, there is no limit to what you can study. For example, say we compare any stock on the New York Stock Exchange versus NASDAQ.

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Besides trying to find which exchange is stronger than the other, what else are we accomplishing? In making this com- parison, we are discovering the current aggressiveness of the in- vesting public. We know that the Dow Jones represents the largest capitalization blue chip issues that are considered con- servative in nature. We also know that the NASDAQ often is the standard bearer for more aggressive trading vehicles. By taking a relative strength reading of one to the other, we can surmise what the risk tolerance of investors currently is. Obvi- ously, if the NASDQ is showing better strength than the DJIA, then investors’ confidence levels are high and the overall feel- ing is positive. If investors were worried about the future and the uncertainly were prevalent, then the more conservative is- sues would be gaining the power. In times of uncertainty, in- vestors seek safe havens for protection.

There are many styles that can be related to each other with a certain amount of predictive relevance to them. Suppose we compared commodities to stock prices in order to examine leadership in one market arena versus the other. It would be extremely relevant to know if gold and metal should be pur- chased rather then say Microsoft (MSFT) or Halliburton (HAL). If we compared stocks to bonds in this R/S chart, we could see a picture of the Street’s expectation toward interest rates. How about one international market against another?

Knowing the “type” of equity being bought is just as im- portant as “where” they are being purchased. Building a rela- tive strength chart of large capitalization to small capitalization can give us more information as to where we should be looking for new stock ideas.

There are many more combinations to this approach, like value issues versus growth or high-priced versus low-priced is- sues, etc. (See Figure 11-4.)

It is sometimes a strange concept to come to grips with, but most accounts live and die by relative performance. Here we have a situation that requires a manager to outperform an in- dex, let’s say the S&P 500. I did not say that the manager had to show a profit, but rather that her performance had to be bet- ter than the index. In English that means you can have a net loss of say 5 percent during a given period when the S&P 500

is down 6 percent and show a positive relative performance by beating your benchmark. Your portfolio, in other words, did bet- ter than the overall market. So many institutional accounts abide by R/S almost as a religion. The theory is that the strongest issue out in front of the pack is likely to be the win- ner. In using relative strength in your portfolio, therefore, what you need to do is to constantly update your stocks and make sure you are holding the best.

As a portfolio manager, you could take your stocks that you are currently holding and compare the entire list to an index. It is important to always compare apples to apples in this task. In other words, if I am an aggressive PM and my typical stock is low priced and high multiple issues, then I should be using, as my de- nominator, an aggressive index rather then the Dow Jones.

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Once that R/S ranking has been accomplished, all you need to know are the names of the top-ranked issues for new pur- chases. I have found that it is always a smart idea to maintain a second list of stocks as a sort of farm team for replacement ideas. Sooner or later your original list of stocks will get stale and need replacing. It’s a question of rotation during a market move. As the market matures, new leadership springs up that you must respond to in order to keep your portfolio current and in the forefront of leadership. We must always be willing to switch into new groups and new stocks when the time calls for action.

NONCONFIRMATION

Relative strength is designed to show us where the power is in the market. By using a particular benchmark, we can compare our stock selection to determine if we are in the correct posi- tions to maximize our profits. That is only half the story. An- other characteristic of relative strength is the ability to warn the technician of a shift in leadership. Never underestimate the value of a negative signal in our business. In a normal rising market, your portfolio should gain ground as the market moves higher, but the names on your list might start to show signs of a slowing R/S line, maybe even a declining pattern. Your stocks might be either moving into a top, or possibly the general mar- ket is gaining strength and leaving your issues behind. Re- gardless of which, you are being warned of a shift. Whether or not you take action will depend on a few things.

1. Has any trend line or support zone been violated? 2. Can you determine if the R/S weakness is due to in-

creased strength in the index or loss of power in your stock?

3. If it is an increase push in the index itself, then you

have to decide if you want to disturb your existing holdings in favor of a stock that is tied to that index. Many times that choice can be made only after you have studied your tools like the trends, volume, chart patterns, and moving averages.