The Relative Strength screen is very much a companion to the EPS screen
we call Unemotional Growth. Like UG, this screen starts with the 100 top-ranked
stocks in the Value Line Investment Survey and then uses rankings culled
from Investor's Business Daily.
But what is Relative Strength? Very simply, it's a comparative measure of
how well a stock's price has performed in relation to all the other stocks
in the Investor's Business Daily stock tables over the past twelve months.
The stock's gain or loss over that period is measured in percentage terms
and then ranked against all other stocks and listed in percentiles. So, if
your stock has a Relative Strength ranking of 80, let's say, that means over
the last year, it has outperformed 80% of all other stocks in IBD's database.
Using a pure Relative Strength screen hasn't worked as well as the EPS screen
(Unemotional growth) for shorter holding periods like the monthly cycle we
follow with UG. I tested such a screen when I was developing UG and found
it consistently under-performed the EPS screen.
But over longer periods, the Relative Strength screen is a very powerful
one, as Jim O'Shaughnessy and others have pointed out. For instance, if one
started with the Value Line list of 100 stocks and simply set a minimum score
for both EPS and RS of 90, and then took stocks from that list with the highest
RS ranking and held a full year, over the last decade, such a simple model
generated compounded gains of 35% a year for either a five- or ten-stock
Instructions to generate current rankings:
1. Start with the list of 100 Timely Stocks from page 27 of the Value Line
Investment Survey (excluding any stocks on foreign exchanges).
2. Look up the EPS and RS rankings for each of the stocks.
3. Take the five stocks with the highest RS rankings, using the higher EPS
score to settle any ties for the final position.
4. Update the first Friday of each month. (We're tracking this screen for
a quarterly, semi-annual, and annual holding period as well.)
There is no fully back-tested history for this screen yet.