Page 312 - How to Make Money in Stocks Trilogy

L = Leader or Laggard: Which Is Your Stock? 189

The proprietary RS Rating measures the price performance of a given
stock against the rest of the market for the past 52 weeks. Every stock in
the market is assigned a rating from 1 to 99, with 99 being best. An RS
Rating of 99 means that the stock has outperformed 99% of all other
companies in terms of price performance. A RS of 50 means that half of
all other stocks have done better and half have done worse.

If your stock’s RS Rating is below 70, it is lagging the better-performing
stocks in the overall market. That doesn’t mean that it can’t go up in price.
It just means that if by some chance it does go up, it’ll probably go up less.

From the early 1950s through 2008, the average RS Rating of the best-
performing stocks before their major run-ups was 87. In other words, the
best stocks were already doing better than nearly 9 out of 10 others when
they were starting out on their most explosive advance yet. So the rule for
those who are determined to be big winners in the stock market is: look
for the genuine leaders and avoid laggards and sympathy plays. Don’t buy
stocks with Relative Strength Ratings in the 40s, 50s, or 60s.
The Relative Price Strength Rating is shown each day for all stocks listed
in Investor’s Business Daily’s stock tables. You can’t find this information in
any other daily business or local newspaper. Updated RS Ratings are also
shown on the Daily Graphs Online charting service.
A stock’s relative strength can also be plotted on a chart. If the RS line has
been sinking for seven months or more, or if the line has an abnormally
sharp decline for four months or more, the stock’s price behavior is highly
questionable, and it should probably be sold.

Pick 80s and 90s That Are in Sound
and Proper Base Patterns

If you want to upgrade your stock selection so that you’re zeroing in on the
leaders, restrict your purchases to companies showing RS Ratings of 80 or
higher. There’s no point in buying a stock that’s straggling behind. Yet that’s
exactly what many investors do—including some who work at America’s
largest investment firms.
I don’t like to buy stocks with Relative Price Strength Ratings less than
80. In fact, the really big moneymakers generally have RS Ratings of 90 or
higher just before they break out of their first or second base structure. The
RS Rating of a potential winning stock should be in the same league as a
pitcher’s fastball. The average big-league fastball is clocked at 86 miles per
hour, and the best pitchers throw “heat” in the 90s.