Summary
In a bull market, select stocks with high price relative strength (strong upward price momentum). They rise quickest.
However, in a bear market, avoid the top ranked stocks because they fall fastest. Select those with mid-range relative strength.
They decline least. After a bear or down market, switch back into the top ranked stocks.
Methodology
I measured the price performance of each stock in my database for performance over the prior six months.
That means I measured the percentage change from today’s close to the close six months ago and then ranked the results.
I did this for each stock (up to 508 of them), beginning from 1/1/1995 until 12/24/2007.
That means, the day after the January 1995 New Year’s holiday, I looked back six months and computed the price range, sorted, and saved the rankings.
Then I looked at the next day and made the same computation. I continued this method until reaching the end date.
After building the database, I used two basic periods of study, the recent bear market in the S&P 500 index from 3/24/2000 to 10/10/2002,
and the bull market thereafter, from 10/11/2002 to 12/21/2005. I stopped at 2005 because I looked two years into the future to see
how the stocks behaved and that would take us to the end of the study period.
The easiest explanation of how I did this comes from looking at the results. The below table shows the average performance
of 10 stocks from three ranked groups: the best ranked stocks (1-10), middle (ranks 224-234) and worst (448-458) for the bear market.
Only 458 stocks existed in the database back then.
I looked at each of the 10 stocks and found the average price change for each day in the measurement period (from 3/24/2000 to
10/10/2002) to a date from one month to two years into the future. For example, if 3M had a relative strength rank of one on 3/24/2000,
then I measured the change in price from 3/24/2000 to one month later. Then I did the same for the second ranked stock then the third
and continued until the tenth ranked stock. Then I advanced to the next day, found the top 10 ranked stocks, and measured the future price move.
I continued this procedure until I reached the end of the bear market. Then I averaged the results and found that they showed a decline of
4% over the month and at the end of that period, the average rank had dropped to 26.
Then I moved to the next period, two months, and measured the average price change of the ten stocks over the coming two months
for each day of the bear market. They showed that the decline had worsened to a loss of 5% and the average rank had dropped to 57.
I continued this procedure until finding the price change two years in the future for each day in the bear market.
Results
The following table shows the average price performance and average rank of 10 stocks in the bear market.
This shows that the top ranked stocks tumbled the farthest followed by the worst ranked stocks. The mid range ones held up the best.
During the two year test period, the best-ranked stocks tumbled 31%, the worst tumbled 11% and the mid range ones actually climbed 3%.
Since I used each day in the bear market and looked forward from there, you can probably think of the results as the performance of a
stock midway (about 15 months) into the bear market projected one month, two months, and so on, into the future. Coming out of the bear
market is why you see a recovery from -2% to 3% for the middle range, and an improvement in the worst ranked stocks (but the best-ranked
ones were still dropping).
10 stock range, bear market from 3/24/2000 to 10/10/2002.
|
1-10 |
Avg |
224-234 |
Avg |
448-458 |
Avg |
|
|
Best |
Rank |
Middle |
Rank |
Worst |
Rank |
|
|
-4% |
26 |
0% |
225 |
-5% |
434 |
1 month |
|
-5% |
57 |
-1% |
226 |
-9% |
412 |
2 months |
|
-7% |
100 |
-1% |
224 |
-12% |
382 |
3 months |
|
-18% |
228 |
-2% |
227 |
-15% |
254 |
6 months |
|
-28% |
250 |
-3% |
231 |
-19% |
246 |
9 months |
|
-30% |
233 |
-2% |
231 |
-22% |
237 |
1 year |
|
-31% |
248 |
3% |
238 |
-11% |
209 |
2 years |
Notice how the average rank drops from 26 to 248 for the top ranked stocks. The middle group shows a stable rank and the group
with the worst relative strength shows the average relative strength rank improving form 434 to 209. In other words, the top
ranked stocks took a big hit during the bear market. Those in the middle suffered but not nearly as much, and the worst ranked
stocks showed improving relative strength.
10 stock range, post bear market, from 10/11/2002 to 12/21/2005
|
1-10 |
Avg |
231-241 |
Avg |
462-472 |
Avg |
|
|
Best |
Rank |
Middle |
Rank |
Worst |
Rank |
|
|
4% |
19 |
1% |
238 |
2% |
432 |
1 month |
|
7% |
41 |
3% |
244 |
4% |
388 |
2 months |
|
10% |
72 |
4% |
247 |
6% |
348 |
3 months |
|
19% |
191 |
8% |
255 |
14% |
215 |
6 months |
|
25% |
204 |
12% |
252 |
21% |
216 |
9 months |
|
32% |
225 |
16% |
247 |
27% |
219 |
1 year |
|
52% |
218 |
32% |
251 |
43% |
258 |
2 years |
This table shows the average performance of 10 stocks after the bear market. The number of stocks increased to 472 because
those are the ones that existed in 2002. The results show that the best-ranked stocks had the highest improvement over time.
The middle group was the worst performing and the stocks with the lowest rank came in second.
For example, the top 10 ranked stocks for relative strength soared an average of 52% over the two-year test period.
The stocks with the worst relative strength climbed 43%, and the middle group climbed just 32%.
25 Stocks
The prior two tables used 10 stocks, but the next two tables use 25 stocks covering the same period, a bear market
and then a bull market. The results are similar. During a bear market, avoid those stocks having the highest relative strength.
The middle group does best.
25 stock range, bear market from 3/24/2000 to 10/10/2002
|
1-25 |
Avg |
211-236 |
Avg |
433-458 |
Avg |
|
|
Best |
Rank |
Middle |
Rank |
Worst |
Rank |
|
|
-2% |
41 |
0% |
223 |
-3% |
421 |
1 month |
|
-3% |
77 |
-1% |
223 |
-6% |
394 |
2 months |
|
-6% |
117 |
-1% |
222 |
-8% |
366 |
3 months |
|
-16% |
237 |
-2% |
226 |
-13% |
251 |
6 months |
|
-23% |
256 |
-3% |
231 |
-16% |
241 |
9 months |
|
-25% |
239 |
-3% |
233 |
-18% |
236 |
1 year |
|
-23% |
247 |
3% |
239 |
-12% |
233 |
2 years |
The next table shows the results of the bull market study. The stocks with the highest relative strength perform best followed by those with the worst relative strength. Stay out of the middle group because they perform worst.
25 stock range, bull market from 10/11/2002 to 12/24/05
|
1-25 |
Avg |
217-242 |
Avg |
447-472 |
Avg |
|
|
Best |
Rank |
Middle |
Rank |
Worst |
Rank |
|
|
4% |
34 |
1% |
236 |
2% |
421 |
1 month |
|
7% |
61 |
3% |
241 |
4% |
379 |
2 months |
|
10% |
91 |
4% |
245 |
6% |
341 |
3 months |
|
19% |
196 |
8% |
255 |
13% |
221 |
| 
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