Relative Strength is an important factor in most Workshop strategies, and it also performs very well on its own. There are several variations of Relative Strength strategies, all of which have had superb returns for short and long holding periods.
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Before we get to the numbers, we should explain what Relative Strength is. Relative Strength refers to a stock's price performance relative to other stocks. For example, if the market is down 20% and XYZ Co. is up 10%, then XYZ has a high relative strength. If the market was up 30% and XYZ Co. was up 10%, then XYZ would have a low relative strength.
By itself, Relative Strength (or RS) is another term for momentum. Investing solely on momentum can be a risky proposition. Our Workshop strategies start with the stocks rated "Timeliness One" by Value Line. This limits our universe to high-quality companies with strong fundamentals.
We follow two "official" Relative Strength strategies at the Workshop. The first strategy takes all 100 stocks rated Timeliness One by Value Line and ranks them by highest Total Return (stock price increase plus income from dividends, etc.) over the prior 26 weeks. It is creatively named "Relative Strength, 26-week" or "RS-26" for short. The other strategy ranks all 100 Timeliness One stocks by highest Total Return over the past 13 weeks, and is known as "RS-13."
Several other unofficial RS strategies that have been backtested by Workshop contributors. These include RS-4 (four-week total return), RS-52 (52-week total return), and RS-IBD, which uses the RS rankings published by Investors Business Daily.
Another wrinkle is the RS-Overlap screen, which selects stocks from both the RS-26 and RS-13 screens. This strategy was recently reviewed by Moe Chernick.
How have all of these strategies done? Below are the results for the five-stock RS-4, RS-13, RS-26, RS-52, and RS-Overlap strategies. These results show the arithmetic averages of the average annual returns for portfolios started in each month of the year from January 1986 through August 2000. As always, we show the Compound Annual Growth Rate (CAGR, higher is better) and Geometric Standard Deviation (GSD, lower is better). The S&P 500 is presented for comparison.
RS4 Annual Semi Quarterly Monthly
CAGR 28.9% 32.3% 38.6% 42.5%
GSD 34.7% 32.2% 33.6% 36.6%
RS13 Annual Semi Quarterly Monthly
CAGR 31.2% 37.2% 37.0% 54.6%
GSD 30.1% 35.7% 38.8% 56.2%
RS26 Annual Semi Quarterly Monthly
CAGR 32.8% 42.8% 47.8% 51.3%
GSD 40.3% 43.5% 43.6% 44.4%
RS52 Annual Semi Quarterly Monthly
CAGR 28.4% 38.4% 43.9% 51.9%
GSD 38.4% 43.4% 45.8% 38.2%
RS-O Annual Semi Quarterly Monthly
CAGR 32.0% 40.9% 42.2% 56.6%
GSD 35.2% 38.7% 38.1% 42.5%
S&P500 Annual Semi Quarterly Monthly
CAGR 17.0% 16.4% 16.6% 17.0%
GSD 12.3% 11.3% 11.3% 11.8%
Many Workshop investors trade the RS screens monthly. As you can see, the results have been spectacular! However, the results for longer holding periods aren't too shabby, either. Even the annual strategies have returned around 30% per year since 1986, and these returns have come with lower trading costs and the possibility of lower capital gains taxes.
In the interest of full disclosure, I should point out that I use an RS-26 annual strategy in my Small Money Port. Since December 28, 1999, my purchases of Qualcomm (Nasdaq: QCOM), JDS Uniphase (Nasdaq: JDSU), Network Appliance (Nasdaq: NTAP), Siebel Systems (Nasdaq: SEBL), and Titan (Nasdaq: TTN) have returned an astounding 52.91% through September 18, 2000. However, please remember that individual portfolio results can vary widely. A five-stock RS-26 annual strategy started just one week later would be down more than 34% so far this year! Average returns can't predict how your next portfolio will do.
If you want to learn more, please visit us at the Foolish Workshop discussion board, where we'll be glad to answer any of your questions. If you decide that Relative Strength would make a good addition to your portfolio, you might want to check out Mike Sellers' report on Relative Strength Investing available through Soapbox.com.
Next week we'll conclude this series of articles on the Workshop strategies with summaries of all the screens and comparisons of their historical returns. I hope to you see you then -- same Fool time, same Fool channel!
Related Links:
Beating the Market for 30 Years, Foolish Workshop, 8/8/00
The Backtest Tool
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