Stock Relative Strength Part 2

As of 12/20/2024

Indus: 42,840 +498.02 +1.2%

Trans: 15,892 +32.54 +0.2%

Utils: 986 +14.76 +1.5%

Nasdaq: 19,573 +199.83 +1.0%

S&P 500: 5,931 +63.77 +1.1%

YTD

+13.7%

0.0%

+11.9%

+30.4%

+24.3%

Targets Overview: 12/12/2024

44,200 or 41,750 by 01/01/2025

16,100 or 17,700 by 01/01/2025

1,050 or 975 by 01/01/2025

20,500 or 19,300 by 01/01/2025

6,100 or 5,775 by 01/01/2025

Chart Pattern Indicator:

on 12/5/24

As of 12/20/2024

Indus: 42,840 +498.02 +1.2%

Trans: 15,892 +32.54 +0.2%

Utils: 986 +14.76 +1.5%

Nasdaq: 19,573 +199.83 +1.0%

S&P 500: 5,931 +63.77 +1.1%

YTD

+13.7%

0.0%

+11.9%

+30.4%

+24.3%

Targets Overview: 12/12/2024

44,200 or 41,750 by 01/01/2025

16,100 or 17,700 by 01/01/2025

1,050 or 975 by 01/01/2025

20,500 or 19,300 by 01/01/2025

6,100 or 5,775 by 01/01/2025

Chart Pattern Indicator:

on 12/5/24

Bulkowski on Stock Relative Strength

Part II

This study is the second part of two that discusses stock relative price strength, whether stock performance when compared to its peers is a good indicator of future results. This page tests various methods to see how well they work.

Stock Relative Strength: Summary

Buy a stock with high relative price strength and sell it when performance (when the rank) drops. Buying a lower ranked stock, watching it climb up the rank scale, and then drop results in worse average performance. Concentrate buying high ranked stocks (those with the best price relative strength) and avoid those with worse relative performance.

Stock Relative Strength: Background

This document discusses tests which show how to use stock relative price strength to improve trading results. All tests use a database that begins on May 18, 2005 and ends on December 6, 2007. The intent was to split the period after the end of the 2000-2002 bear market into two equal pieces for in-sample and out-of-sample tests. However, preliminary results were dismal and did not warrant additional testing beyond the most recent bull market. None of the tests include dividends, commissions, or other fees.

Stock Relative Strength: Test 1

Stock Relative Strength: Test 1 Analysis

A stock with high relative price strength means it outperformed its peers over the prior six months, close to close. I used a buy rank of at least 5 or better (meaning stocks ranked 1 to 5) and sold them when the rank dropped to 10, 15, 20, and so on. I measured the average profit for the group and compared it to the performance of the S&P 500 over the same hold time. The following table shows the results.

Buy	Sell	Avg hold	# of	Avg	S&P	Profit
>=	<	Time (days)	Trades	Profit	Profit	Factor
5	10	38	165	2.3%	0.9%	2.6
5	15	55	129	1.9%	1.2%	1.6
5	20	68	114	3.3%	1.4%	2.4
5	25	75	108	3.3%	1.7%	1.9
5	30	81	102	2.6%	1.9%	1.4
5	35	90	98	3.2%	2.0%	1.6
5	40	98	95	4.5%	2.4%	1.7
5	45	100	94	4.2%	2.5%	1.9
5	50	108	91	5.0%	2.7%	1.9

10	50	90	190	4.9%	2.3%	2.1
15	50	81	264	6.3%	2.2%	2.9
20	50	69	368	5.2%	1.9%	2.7
25	50	60	484	4.3%	1.5%	2.9
30	50	51	633	3.3%	1.3%	2.5
35	50	39	901	2.0%	0.9%	2.2
40	50	31	1254	1.4%	0.8%	1.8
50	100	69	822	2.1%	1.8%	1.2
Buy	Sell	Avg hold	# of	Avg	S&P	Profit
>=	<	Time (days)	Trades	Profit	Profit	Factor

I split the tests into two groups. The first group buys at a rank of 5 or better and sells at ranks of 10 through 50. For example, in the 508 stocks I looked at with relative strength ranks between 1 and 5, I bought and held them until the rank dropped below 10. That took an average of 38 days, and the profit averaged 2.3%. The S&P, over the same hold time, gained 0.9%. That means the stocks performed 2.6 times better than the S&P.

In the second group, I changed the buy rank but kept most of the sell rank steady. For example, I bought when the rank was 10 or better and sold when the rank dropped below 50. The average hold time was 90 days, and the 190 trades made an average of 4.9% compared to 2.3% returned by the S&P 500.

Stock Relative Strength: Test 1 Summary

The profit factor shows which tests performed best when compared to the S&P 500. They are buy at rank 5 and sell at either ranks 10 (profit factor 2.6) or 20 (profit factor 2.4). The second group shows the best performance when buying at ranks 15 and 25 and selling at rank 50. Both have profit factors of 2.9.

In the first group, as the sell rank drops, the hold time increases as you might expect. The number of completed trades drop, because fewer stocks actually fall to the lower rank. Since the hold time is just over a month for the buy at 5/sell at 10 test, that would be the preferred choice for trading. In words, buy any stock with a relative strength rank of 5 or better (1 to 5) and sell it when the rank drops to 11.

If you want a longer-term holding, then buy stocks ranked 15 or better (1 to 15) and sell when they drop to 51. That gives the highest average profit (6.3%) and highest profit factor, 2.9. The hold time decreases for the second group as the table shows and that's because the difference between the ranks (10 to 50, 15 to 50, and so on) narrows as you move down the list until the 50/100 line.

Stock Relative Strength: Test 2

Buy at a given rank and sell when it rises to a higher rank. Exclude those not rising to the sell rank.

Stock Relative Strength: Test 2 Analysis

After I completed the test, I discovered a flaw: The test throws out stocks that fail to rise to the sell rank. However, it does show interesting results.

I split the database into three groups: buy ranks of 50, 250, and 450. Each of the sell ranks are the same distance from the buy. That means the buy/sell rank of 50/45 has a difference of 5 as does the 250/245 and 450/445 pairs. The ranks of 50/40 are the same distance as 250/240 and 450/440. And so on.

For the first test in the series, I bought a stock when the rank hit 50 and sold it when it climbed to a rank of 45 or better. The average hold time for the 249 trades was 42 days, and the profit was 4.4% compared to 1.2% for the S&P 500. This gave a profit factor of 3.7.

Buy	Sell	Avg hold	# of	Avg	S&P	Profit
=	>=	Time (days)	Trades	Profit	Profit	Factor
50	45	42	249	4.4%	1.2%	3.7
50	40	57	230	6.1%	1.5%	4.1
50	35	82	197	9.1%	2.1%	4.3
50	30	112	165	17.6%	3.1%	5.7
50	25	133	142	23.8%	3.5%	6.8
50	20	157	124	32.6%	4.2%	7.8
50	15	177	101	39.8%	4.9%	8.1
50	10	209	82	42.1%	6.1%	6.9
50	5	280	45	73.7%	8.9%	8.3

250	245	27	323	0.9%	0.7%	1.3
250	240	32	321	1.3%	0.8%	1.6
250	235	38	320	1.6%	1.0%	1.6
250	230	45	318	1.6%	1.3%	1.2
250	225	50	316	1.7%	1.3%	1.3
250	220	59	315	1.9%	1.5%	1.3
250	215	67	315	2.0%	1.7%	1.2
250	210	70	314	2.5%	1.8%	1.4
250	205	76	312	2.8%	1.9%	1.5

450	445	18	258	0.9%	0.7%	1.3
450	440	25	257	1.3%	1.0%	1.3
450	435	34	257	1.0%	1.1%	0.9
450	430	38	255	1.2%	1.2%	1.0
450	425	44	255	1.5%	1.3%	1.2
450	420	46	254	1.9%	1.3%	1.5
450	415	52	253	1.9%	1.4%	1.4
450	410	57	253	1.9%	1.5%	1.3
450	405	60	252	2.0%	1.6%	1.3
Buy	Sell	Avg hold	# of	Avg	S&P	Profit
=	>=	Time (days)	Trades	Profit	Profit	Factor

Stock Relative Strength: Test 2 Summary

The idea behind the test was to determine if you should buy a high ranked stock, mid ranked, or low ranked one for the best performance. Do low ranked stocks climb faster and represent a better value? No. The numbers show that the mid and low ranked stocks don't move much at all. Only the top ranked stocks perform well.

For example, the worst performance of the top tier stocks, buy at 50 and sell at 45, is substantially better than all of the tests in the middle or lower groups. The best they could muster is 2.8% for 250/205 and 1.6% for 450/405.

The results assume you pick stocks that reach the sell rank. Many will not, so the results overestimate performance. Do not use this method to trade stocks. Test 3 is a more realistic test.

Stock Relative Strength: Test 3

Buy at a lower rank and ride the stock as the performance rank climbs. If the rank peaks and declines, then sell.

Stock Relative Strength: Test 3 Analysis

The test uses a "high water mark" to determine the peak rank, which is the best rank reached before it sinks. Sell the stock when the rank drops below the high water mark.

For example, the first line in the table shows that the program buys a stock when it reaches 50 or better. As price climbs, so does the rank. When the rank peaks and then drops by at least 5, the stock is sold. In this example, the average hold time was six days in the 1,431 trades. Profit was 0.2% and the average rank peaked at 38. The stock was sold as it declined to a rank of 38 (or whatever the high water mark was for that stock) plus 5 or 43. Notice that in the first group, performance is about even or slightly better than the change in the S&P 500 over that same test period.

Group 2 (buy at 250) and group 3 (buy at 450), also showed flat (250 group) to worse (450 group) performance when compared to the S&P 500. Based on the numbers, it suggests that picking stocks from the top group results in slightly better performance than picking them from the middle of the list and certainly better than picking them from the bottom of the list.

For the last group in the table, I used a large rank swing: 150. If you bought a bottom ranked stock, 450, and held it until price peaked and then dropped by 150 ranks, you would have made 5.9% compared to the 5.5% delivered by the S&P 500. The average hold time for the trade was about six months (187 days).

Picking stocks from any of the other groups and holding for a 150 rank give back resulted in performance worse than the S&P 500.

Buy	Sell	Avg hold	# of	Avg	S&P	Profit	Avg High
>=	>HWM + x	Time (days)	Trades	Profit	Profit	Factor	Water mark
50	5	6	1431	0.2%	0.2%	1.0	38
50	10	10	1691	0.3%	0.3%	1.0	36
50	15	15	1657	0.5%	0.4%	1.3	34
50	20	21	1563	0.6%	0.5%	1.2	33
50	25	26	1452	0.5%	0.5%	1.0	32
50	30	30	1336	0.6%	0.6%	1.0	32
50	35	36	1241	0.9%	0.8%	1.1	31
50	40	40	1163	1.0%	1.0%	1.0	30
50	45	44	1080	1.3%	1.1%	1.2	30

250	5	4	2226	0.0%	0.1%	0.0	214
250	10	5	3290	0.1%	0.1%	1.0	209
250	15	6	3831	0.1%	0.1%	1.0	204
250	20	7	4026	0.1%	0.2%	0.5	200
250	25	9	4113	0.2%	0.2%	1.0	196
250	30	11	4110	0.3%	0.3%	1.0	191
250	35	13	4038	0.3%	0.3%	1.0	187
250	40	16	3916	0.4%	0.4%	1.0	183
250	45	18	3822	0.4%	0.4%	1.0	179

450	5	5	1466	0.0%	0.1%	0.0	421
450	10	8	1677	0.0%	0.1%	0.0	411
450	15	11	1597	0.0%	0.2%	0.0	401
450	20	15	1488	-0.1%	0.3%	-0.3	391
450	25	19	1372	-0.2%	0.4%	-0.5	380
450	30	24	1264	-0.2%	0.5%	-0.4	369
450	35	30	1163	0.0%	0.7%	0.0	355
450	40	36	1087	0.4%	0.9%	0.4	343
450	45	43	990	0.6%	1.0%	0.6	328

450	150	187	503	5.9%	5.5%	1.1	140
300	150	101	1861	1.7%	2.7%	0.6	150
200	150	89	1875	1.0%	2.3%	0.4	104
150	150	91	1543	1.0%	2.3%	0.4	77
Buy	Sell	Avg hold	# of	Avg	S&P	Profit	Avg High
>=	>HWM + x	Time (days)	Trades	Profit	Profit	Factor	Water mark

Stock Relative Strength: Test 3 Summary

While the idea of buying a stock with a lower rank, riding it upward and selling when the rank deteriorated had merit, the test showed that it resulted in performance no better than the S&P 500. Do not use this method to trade stocks.