<FOOLISH WORKSHOP>
Relative Strength: Simply Awesome
By
EL SEGUNDO, CA (August 24, 1999) -- There is one major problem with the RS-26 week screen. It is so simple that it is hard to believe it works. Yet it does, to the tune of 43.6% per year from 1987-1998 without one losing year. The screen has also returned over 40% each of the last four years including 149% last year. For 1999, RS-26 week strategy (renewing annually) was up over 40% by midyear.
What is the RS-26 week screen? RS stands for Relative Strength -- stocks are ranked based on how quickly their price is going up. It is a plain and simple buy high, sell higher strategy. However, that's also a recipe for disaster if not done right. Here's how we do it.
Step 1: Take all stocks with a Value Line (VL) Timeliness Rating of 1. We are starting with stocks that the analysts at Value Line think will do best over the next 6 to 12 months.
Step 2: Buy the five stocks with the Highest 26-Week Total Return according to the most recent issue of Value Line. These are the stocks that have shown the highest price appreciation over the last six months.
Step 3: Repeat steps 1 and 2 every month. Hang on to any stock still on the list and replace any that have fallen off.
If you're like me, you may have trouble persuading yourself to invest in this screen. I know when I first saw the P/E ratios of the stocks on this screen and the huge price appreciation that these stocks already had, I thought it was nuts to invest in such companies. However, a year and a quarter later, with my money close to tripling, I'm convinced.
While this screen works best on a monthly cycle, it also works well for longer time periods. For holding periods longer than one month, you can improve the results significantly by dropping the top stock.
This screen also works well with other RS values. An RS screen that uses total return from a 13-week period has a backtested return that is almost identical to the 26-week variation. The 13-week also works well as a quarterly screen but should be avoided for longer holding periods.
Every week we run the numbers and publish the top-ranked RS-26 week stocks. See the link at the right called New Rankings. For do-it-yourself-ers, there is a version of this screen that can be done at your local library, although we publish those rankings, too. This version has done the best over the last 2 1/2 years but has not been backtested beyond that yet. This version is called RS-IBD.
To do the RS-IBD screen, go to your local library and find the most recent Value Line printed edition. Find page 27 where VL lists all the stocks that have a timeliness value of 1 (i.e., their best bets for price performance in the near-term future). Then get a current copy of Investor's Business Daily (IBD), which you can get either at the library or your local newsstand. In IBD, look up the 100 stocks from your VL list. For each stock, write down IBD's RS and EPS rating for that stock. (From a practical standpoint, you can ignore any stock with an RS of less than 90.) Then sort your list by RS (highest to lowest). Use the EPS rating to break any ties (higher is better). Buy the top five stocks.
Without a complete backtest, the IBD version may be one you're reluctant to invest in. However, the lack of a backtest in this case should not be as troublesome as might normally be the case. This is because from our other backtests, we know that since 1987 RS screens have worked extremely well for various lengths of times, and that since 1997 this screen has been awesome. So a backtest may or may not show that this is the best variation of RS, but it is almost sure to show that it has beaten the market hands down since at least 1987.
Whether it's RS-IBD or RS-26 weeks, having a relative strength monthly screen can be a very profitable addition to your portfolio.