Why relative strength should be a part of your toolkit

Friday, Jun 21 2019 by
59
Why relative strength should be a part of your toolkit

You don’t need to be a rocket scientist. Investing is not a game where the guy with the 160 IQ beats the guy with 130 IQ.’ — Warren Buffett

Another day, another Warren Buffett quote... He's right though. Successful investing can be relatively simple. Nowhere is this more obvious than in the persistent outperformance of relative strength strategies, where investors buy companies that have outperformed the wider market over a set period of time.

Imagine: investor A gets home from work, studiously notes up financial statements, trawls through the footnotes, follows the cash flows, makes the adjustments, finds the value, and places his bets. Investor B wakes up, turns on her computer, and simply buys what's gone up recently.

The evidence over the years suggests Investor B's portfolio is likely to motor ahead.

No surprise then, that Stockopedia’s Price Momentum Screen is one of the top-performers over multiple timeframes. The screen is up 45% over two years and has staged a strong recovery so far in 2019, up nearly 25% since the start of January.

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The screen itself is as simple as they come: take companies with positive six-month and one-year relative strengths and a negative one-month relative strength, and then sort the results in descending order of one-year relative strength. Investor B would be proud.

Here are the top ten companies with the strongest one-year relative strength and a market cap of over £100m:

Name

Market cap

RS 1yr

RS 6m

RS 1m

Sector

Eco Atlantic Oil & Gas

162.4

+141.3

+81.2

-15.7

Energy

Serica Energy

355.2

+128.8

+7.35

-0.65

Energy

AB Dynamics

537.9

+119.2

+51.9

-2.98

Consumer Cyclicals

Churchill China

167.5

+65.0

+47.4

-2.59

Consumer Cyclicals

Marshalls

1,309

+61.8

+31.7

-1.48

Basic Materials

San Leon

176.1

+61.3

+45.3

-4.19

Energy

Coca-Cola European Partners

21,172

+56.9

+15.5

-0.25

Consumer Defensives

IFG

198.1

+55.7

+28.5

-1.13

Financials

4imprint

727.4

+51.4

+26.2

-4.41

Consumer Cyclicals

Alpha FX

297

+50.4

+29.3

-2.18

Financials

One thing to note about this screen is that, depending on the conditions, the very fastest moving stocks can sometimes be speculative and unpredictable. As a result, you can see slightly more exotic small-cap energy and technology names. But it can also pick up fast moving, higher-quality plays as well. Some of those currently include stocks like AB Dynamics, Churchill China and 4imprint.

It’s no surprise that relative strength is a measure that’s appealed to some very successful investors over the years...

The legendary British investor Jim Slater, generated ‘spectacular’ results by using relative strength in conjunction with his signature PEG and a price-to-cash flow measure in Beyond the Zulu Principle. Over a six month sample period, his relative strength screen returned…

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Disclaimer:  

As per our Terms of Use, Stockopedia is a financial news & data site, discussion forum and content aggregator. Our site should be used for educational & informational purposes only. We do not provide investment advice, recommendations or views as to whether an investment or strategy is suited to the investment needs of a specific individual. You should make your own decisions and seek independent professional advice before doing so. The author may own shares in any companies discussed, all opinions are his/her own & are general/impersonal. Remember: Shares can go down as well as up. Past performance is not a guide to future performance & investors may not get back the amount invested.


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AB Dynamics plc is a holding company, which is engaged in the provision of testing systems to the global motor industry. The Company is a designer, manufacturer and provider of testing and measurement products for vehicle suspension, brakes and steering to the global automotive research and development sector. Its geographical segments include the United Kingdom, Rest of the European Union, North America and Rest of the World. It designs and manufactures specialized testing systems to produce equipment for its customers to develop suspension, brake, chassis and steering systems; evaluate vehicle dynamics and safety systems on the track; employ driver in loop simulation for prototyping; develop and evaluate the next generation of safety systems in vehicles; test and evaluate the technology for use in future driverless cars/autonomous vehicles, and carry out end-of-line noise/vibration (NVH) testing of power train assemblies. more »

LSE Price
2570p
Change
 
Mkt Cap (£m)
564.3
P/E (fwd)
40.8
Yield (fwd)
0.2

Churchill China plc is a United Kingdom-based manufacturer and distributor of tabletop products to the hospitality and retail sectors across the world. The Company's customers include pub, restaurant and hotel chains, sports and conference venues, health and education establishments, and contract caterers. The Company's segments include Hospitality and Retail. The Company primarily offers ceramic tableware. The Company also manufactures and sources product sold through Retail customers for consumer use in the home, in various markets across the world. The Company offers Churchill branded manufactured products. The Company offers various types of products, such as accessories, beverage pots, bowls and dishes, cake stands, cookware, cups, mugs, cutlery, dip pots and sauce dishes, glassware, jugs, melamine items, plate towers, plates, saucers and wooden items. Its collections include Alchemy Fine China, Churchill Super Vitrified, Art de Cuisine, Sola Cutlery and Lucaris Glassware. more »

LSE Price
1595p
Change
 
Mkt Cap (£m)
175.2
P/E (fwd)
20.1
Yield (fwd)
2.1

4imprint Group plc is a direct marketer of products in the United States, Canada, the United Kingdom and Ireland. The Company supplies products under the brand name 4imprint. The Company sells a range of promotional products, which are purchased by a range of individuals within various types and sizes of businesses and organizations. These products have a range of uses as an integral part of sales and marketing activities; recruitment and recognition schemes; health and safety programs; and other initiatives to make a connection between the customer's organization and the recipient. Its promotional products consist of basic giveaways, such as pens, bags and drinkware to more exclusive products, such as embroidered clothing, business gifts and full color trade show displays. The Company's subsidiaries, 4imprint Inc. and 4imprint Direct Marketing Limited, are engaged in direct marketing activities. more »

LSE Price
2630p
Change
0.8%
Mkt Cap (£m)
738.6
P/E (fwd)
20.9
Yield (fwd)
2.6



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21 Comments on this Article show/hide all

HumourMe 19th Jun 2 of 21
2
Please can you tell us the purpose of including negative one month relative strength in the screen?

First paragraph 'For the geeks'

https://help.stockopedia.com/p...

I interpret this as buy on pullbacks ...

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Jack Brumby 19th Jun 3 of 21

In reply to post #484976

Thanks HumourMe, I was trying to find a passage from the original study - should've known just to check our own guide!

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pka 19th Jun 4 of 21
1

Personally, I don't think including negative one month relative strength in the screen is a good idea. I suspect that the reason why it was included in the original screen was because many academic papers on momentum state that they ignored the most recent month when they calculated six-month or 12-month relative strength, and there was no easy way to do the same thing with the Stockopedia screens.

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jjis 20th Jun 5 of 21
3

As another reply said this it is standard to exclude 1 month momentum. I believe 1 month relative strength is generally excluded as in simple terms there tend to be be some mean reversion after a strong performance in 1 month. See extract from paper by Clifford S. Asness, Tobias J. Moskowitz, and Lasse H. Pedersen below:

From Value & Momentum Everywhere:
For momentum, we use a similarly “standard” measure which is the past 12-month cumulative raw return on the asset (see Jegadeesh and Titman (1993) and Fama and French (1996)), skipping the most recent month’s return, MOM2-12. We skip the most recent month, which is standard in the momentum literature, since there exists a reversal or contrarian effect in returns at the one month level which may be related to liquidity or microstructure issues (Jegadeesh (1990), Lo and MacKinaly (1990), Boudoukh, Richardson, and Whitelaw (1994), Asness (1994), Grinblatt and Moskowitz (2004)).

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Firtashia 20th Jun 6 of 21

Simple enough criteria for buying; but having bought, what is the criteria for selling? By "rebalancing" aren't you effectively selling stocks off randomly?

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Jack Brumby 20th Jun 7 of 21
4

In reply to post #485186

When you say 'selling randomly' do you mean because there has been no specific company-related development to prompt the sale?

I would say you aren't so much selling randomly as selling systematically and taking a portfolio view rather than a stock-by-stock view.

Rebalancing allows you to draft in stocks that are better aligned with the portfolio strategy of high relative strength. If you don't rebalance, you run the risk of the portfolio drifting away from its stated strategy. 

With this kind of momentum-based portfolio, rebalancing also allows you to (hopefully) avoid mean reversion of growth rates. 

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Peter Craven 21st Jun 8 of 21

Stockopedia have a short term approach to investing. Exemplified by this Relative Strength example and, by the general approach to Momentum investing based on the crossover of the 50 Day and 200 Day moving averages as a buy signal. This leads to a trading culture rather than a long term buy and hold strategy as proselytized by the likes of Buffet et al.

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Stuart Bradley 21st Jun 9 of 21
1

Interesting that in the article, there is the mention of 'composite value'. There is a VC1 (Value Composite 1) screener on a different investing website and I wondered if it is available (or planned?) for Stockopedia?

I have been trying to come up with a decent systematic strategy for momentum investing and the 'when to exit' question is a headache. One often finds that exit is deployed and then the instrument rockets ahead again without me on board - so the question is how to stay invested during pullbacks in order to take advantage of 'possible' future gains whilst at the same time being able to cut a bad investment. Obviously this is not a problem for buy and hold annual rebalancing strategies as described in WWOWS, but I can't help feeling that all of the major performance statistics (compounded gain, standard deviation, Sharpe ratio) could be vastly improved by systematic active management. One solution I thought of testing was by using the VM rank and exiting if falling below a threshold. Alternatively Moving average crossover strategies could work, but they get hammered in sideways markets / trading ranges.
Any thoughts?

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HumourMe 21st Jun 10 of 21
2

In reply to post #485571

Interesting that in the article, there is the mention of 'composite value'. There is a VC1 (Value Composite 1) screener on a different investing website and I wondered if it is available (or planned?) for Stockopedia?

This already? https://help.stockopedia.com/product-guide/stockranks/basics/the-value-rank#how-do-you-calculate-the-valuerank So any screen with a value rank component?

I have been trying to come up with a decent systematic strategy for momentum investing and the 'when to exit' question is a headache. One often finds that exit is deployed and then the instrument rockets ahead again without me on board - so the question is how to stay invested during pullbacks in order to take advantage of 'possible' future gains whilst at the same time being able to cut a bad investment.

For me I've only been able to come up with exit on lower highs or lower lows or a break below congestion or a significant pullback. All very subjective. However, once in profit, I've had to learn to extend my trailing stops which pick up 'significant pullbacks'. When I sell, I sometimes put a limit order to buy, above the previous peak in case it turns around.

Oh ... I've also switched to weekly stats to get away from daily noise. 

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Edward Croft 21st Jun 11 of 21
9

In reply to post #485556

Hi Peter - regarding this comment:

"Stockopedia have a short term approach to investing."

I don't think that's true at all.  Stockopedia as a product is designed to promote individual investor success across a broad range of strategies and investor timeframes - including the long term. 

For context read this article, which is really our model of how to think about the different mindsets that people that trade or invest have - https://www.stockopedia.com/content/heart-club-diamond-spade-what-type-of-investor-are-you-229968/ - it defines four archetypes of investor.

We polled readers last Christmas and asked which archetype they most affiliate with - and it came out as follows:

5d0cab746a206Image_2019-06-21_at_11.03.2
  • A third or our subscriber base are long term buy and hold investors with a quality/income orientation.  
  • A third are systematic investors - who may hold over more medium term timeframes, and use rebalancing and possibly stop losses. 
  • A quarter are quite active stock pickers, and less than 5% self identify as 'traders. This article is clearly appealing more to the systematic or active investor... if you personally align more as a buy and hold investor, then it's understandable that the idea of relative strength is not appropriate to you !   

But it's very healthy to discuss what works in investing - there are many routes to success. 

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trevorgreen 21st Jun 12 of 21

Could someone explain to me how to understand the RS columns on the Momentum tab?If you see a red 5% for example, does this mean this share had done that amount worse than the market even though one might have seen an actual gain in the period? So, a whole row of green entries is what you should be looking for? Presumably the price will also be above the 50 day moving average and near the 52 week high?

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iwright7 21st Jun 13 of 21
4

In reply to post #485571

Stuart,

I have a number of screens incorporating Momentum, but with a tilt to Quality (which has worked better than Value in recent years. One of my favorites is Millennial Money which is modified from the book of the same name by James O'Shaughnessy, (who is the son of Patrick O'Shaughnessy from whom the VC1 screen was derived).

The screen criteria is below - As well as picking up +ve 3M Momentum it also tends to pick high Q scoring companies and tends to pick up high VM companies. I personally am happy to stock pick from this screen, which is a belter.  

In relation to selling I hold these type of companies unless or  until their price drops -15% from my buying price or their is a clear loss of momentum that is not market related.  


5d0caf02a4a19MM.png


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Stuart Bradley 21st Jun 14 of 21

In reply to post #485581

Thanks.
The Value Rank is a relative measure whereas the VC1 is an absolute so it can be used in different ways in screening.
For systematic strategies I'm trying to get away from chart-reading as I do enough of that day-trading and want a more rigid framework for rinse and repeat.
Limit order profit taking could work (at some multiple of risk) and then re-enter on a PB to, say, the 20 or 50ema so that hard-earned profits are not given back too cheaply - or, as you say, the breakout test of prior high or, indeed, the latest major higher low. Again....more technical analysis than I'm looking for with a portfolio of stocks.
Thanks again for the reply.

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Stuart Bradley 21st Jun 15 of 21

In reply to post #485616

iwight7, thank you for your input; I'll take a look.
Stuart

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Peter Craven 21st Jun 16 of 21
1

In reply to post #485601

Hello Ed,

Stockopedia is indeed designed to promote investor success across a range of strategies. However the Stockrank system is most effective according to you own research if stocks are rebalanced quarterly.

I refer to the Stockopedia Presentation "Stock Ranks - Harnessing The Power of Factor Stock Ranks Webinar 2018 Presentation - 22-Aug-2018.pdf"

Page 72. - 5 Year History of the StockRanks.
States "Performance of UK stocks > £10m Mkt Cap between April 2013 & April 2018, rebalanced quarterly"

Page 73. - Decile Performance.
States "*Performance of UK stocks > £10m Mkt Cap between April 2013 & April 2018, rebalanced quarterly"

The many mindsets and trading strategies adopted by Stockopedia clients has no linkage to the effectiveness of rebalancing quarterly.

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pka 21st Jun 17 of 21
1

In reply to post #485811

"However the Stockrank system is most effective according to you own research if stocks are rebalanced quarterly."

Stockopedia's performance figures ignore trading costs, such as bid-offer spreads and stamp duty. If one takes trading costs into account, I would expect that rebalancing annually using StockRanks is likely to be much more effective than rebalancing quarterly.

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Badger1 22nd Jun 18 of 21

In reply to post #485616

iwright,
really like your post no. 13 and the philosophy behind that Millenial screen
Is there anywhere I can duplicate this screen?

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iwright7 22nd Jun 19 of 21
2

In reply to post #485876

Badger,

Yes you can easily do the same by pressing +Create a Screen (in Screens Tab) and add the criteria via the various drop down boxes. Cheers, Ian

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Badger1 23rd Jun 20 of 21

In reply to post #485886

iwright-many tks

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Sutherland 23rd Jun 21 of 21
1

I liked your article on MOMENTUM on 21 June and decided to take a closer look at the nine shares on the list (I omitted Coca-Cola Euro.) as it is a $ stock.

First I checked them against Slater's primary sieves. Only 1 0f the stocks has a PE of less than 15%. Only 2 had a PEG 0f less than I (In 4 cases there is a N/A on your individual stock analysis). Not very encouraging for a follow of Slater.

AS one would expect the Momentum Rank for all the shares was above 80. But if you consider the Ranks when Momentum is excluded they leave a lot to be desired, would any one achieve above 75? Turning to the important VALUE rank they average around 25!

Question should one follow Momentum or the Slater/rank type analysis? There seems to be an incompatability?

Dr P Dawson

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