Page 474 - How to Make Money in Stocks Trilogy

344 INVESTING LIKE A PROFESSIONAL

between 50 and 100 years old may have a well-known brand image, but
often they are losing market share to younger, more innovative companies
that have created newer, better products. Consider the decline of some of
our auto companies and their unions, Alcoa, Eastman Kodak, International
Paper, Xerox, CBS, Gannett, and Citigroup.

Relative Price Strength Rating Shows Emerging Price Leaders
Since we’ve learned that the best stocks are superior price performers even
before their major moves, you should look for stocks with price leadership.
The Relative Price Strength (RS) rating shows you which stocks are the best
price performers, measuring a stock’s performance over the previous 12
months. That performance is then compared with the performance of all
other publicly traded companies and given a 1 to 99 rating, with 99 being
best. Look at the column labeled 2 in the chart example.
Example: An RS rating of 85 means the stock’s price movement has out-
performed 85% of all other common stocks in the last year. The greatest
winning stocks since 1952 and even much earlier showed an average RS rat-
ing of 87 when they broke out of their first price consolidation areas (bases).
In other words, the greatest stocks were already outperforming nearly 90%,
or nine out of ten, of all other stocks in the market before they made their
biggest price gains.
Even in poor markets, a Relative Price Strength rating that breaks below
70 can forewarn you of a possible problem situation. On the sell side, how-
ever, we have a ton of sell rules that can lead you to sell most stocks sooner
and more effectively than relying on a deteriorating relative strength line
that is calculated using the past 12 months’ price action. When you compare
these fact-based performance ratings to the old, unscientific methods,
which were typically based on faulty personal opinions, beliefs, academic
theories, stories, promotions, egos, tips, and rumors, it becomes inarguable
that IBD’s unique factual ratings can give you a more clearheaded edge up
in the complex market.

You Need Both Strong EPS and Strong RS Ratings
The implications of both the Earnings per Share rating and the Relative
Price Strength rating are considerable. So far, you’ve been able to deter-
mine the top leaders in earnings and relative price strength. The vast major-
ity of superior stocks will rank 80 or higher on both the EPS and the RS
ratings before their major moves. Since one of these is a fundamental mea-
surement and the other is a marketplace valuation, insisting on both num-
bers being strong should, in positive markets, materially improve your
selection process.