Stock Rising Does Not Mean Stock Leading
- Rohit Musale, CFA
- 1 day ago
- 2 min read
I recently received a question on one of my YouTube videos.
The subscriber asked whether a stock whose relative strength rating moves from 45 to 65 shows improvement, and whether such a stock should be considered for further analysis or added to the watchlist.
My answer is no.
I would still reject the stock because my base minimum criteria is a relative strength rating of 70. (I prefer 80 or more. The more the better)
If you read Mark Minervini’s book, he talks about something called as the trend template.
In that, he gives criteria related to moving averages, the 52-week high, and the 52-week low.
He clearly states that all of this is applicable only to stocks where the relative strength rating is at least 70.
So just because a stock moves from 45 to 65 does not mean I will start investigating it further.
It is still below 70.
You also need to understand what relative strength really means.
If a stock has a relative strength rating of 65, it means it is doing better than 65% of all stocks in the market, on a 52 week performance basis.
But on the flip side, 35% of stocks are still doing better than this stock.
So why focus on this one?
Why not focus on the 35% that are already stronger?
If you look at the Indian stock market, combining NSE and BSE, there are roughly 5,700 stocks.
35% of that is well over 1,000 stocks.
That means more than 1,000 stocks are doing better than a stock with a relative strength of 65.
So my argument is simple.
Why focus on this stock when there are over 1,000 stronger candidates?
Another important point comes from William O’Neill’s book, How to Make Money in Stocks.
There is a chapter on market leadership.
In the CANSLIM system, the letter “L” stands for leader or laggard.
In that chapter, he talks about using relative strength to identify leaders.
He presents data showing that the average relative strength of leading stocks before their major advances was 87.
That is the average.
If this data improves my odds of success, why would I even consider a stock with a relative strength of 65?
That is why my answer remains no.
Stay away from stocks that have poor relative strength ratings.
This would improve your odds of success
Thank you
Regards,
Rohit Musale, CFA
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