Relative Strength

I know that you read a ton about asset allocation and buy and hold, but the key to outperformance is understanding Relative Strength.
That is why I use so many charts, because they give me a simple picture of what is working and what is not.

Relative Strength, as I use it, defines the areas that are receiving the most Institutional Money Flow – or simply what is Big Money buying and what is Big Money avoiding.

You can break the Stock Market down into simple groups –

Large vs Small
Growth vs Value
Capitalization Weighted vs Equal Weighted
Domestic vs Foreign

Large ($SPX) vs Small ($RUT)

When the line is rising, Large is outperforming Small. When the line is falling, Small is outperforming Large. You want to own the leader, because these trends of outperformance/underperformance historically run an average of 5 to 7 years.

Here are the performance numbers for $RUT and $SPX over the periods I have identified on the chart above.








If you only owned the area of outperformance (Always Better), you substantially outperformed both Large and Small. If you only owned the are of underperformance (Always Worse), you substantially underperformed but Large and Small.

Always Better 650.42%
Always Worse 152.80%

See how much you can benefit from following something as simple as chart above?

If you go back and look at the financial publications, you will discover that they sell past performance and by following their “top fund picks”, you end up loading up on the stuff that worked in the past and may not be positioned properly for what is to come.

I do not consider it “market timing” if I am positioning money for 5 to 7 years. Do you?

These periods of outperformance/underperformance have averaged 5 to 7 years. Past history is no guarantee of future performance, but I will us history as my guide until it proves itself wrong.



If you look at the charts above, you will notice that even if you miss the first year of the Bull Market, you still have a very good shot at outperforming the market over the entire Bull Market.

So I can afford to be patient when committing money. I will pick my spots and buy what is leading. I think Large Cap Growth will lead this Bull Market.