Macro Trading Using Relative Strength

Since the start of our newsletter we have been using a relative strength table that looked at Fidelity Select Sector Funds to show what industry groups are leading and which groups are lagging. The relative strength calculation is similar to the style used by Bill Oneil and IBD but is slightly shorter term in nature. We used the Fido Funds due the their price history and breadth of different groups. Now that there are not only enough different industry group ETF’s, but also the needed price history we have revamped the model to use ETF’s instead.

We publish one list for United States industry groups and one that is focused on global ETF’s with several country and a few sector specific ETF’s. These tables are valuable in a few ways. One is that we have developed a trading model based upon them that uses the rankings along with buy, sell, and money management rules. Over time this model has beaten the market with far less risk. The other way that these tables are useful is that they show you what is strong and what is weak.

While this concept is not rocket science we are consistently surprised how little attention it is given by other traders. By using relative strength we can see what is really working and where investors are going. Many times the supposed “hot sector” is not really that hot. By looking at the tables we can see what is really working and what is not. For instance looking at the Global RS Ranking table below you can see the leaders and the laggards. While it is no surprise that Brazil is at the top when was the last time you saw someone on CNBC telling you to buy Indonesia or Turkey? Yeah we missed that segment as well. (click on table twice to enlarge)

Global RS Rankings


Right now this table is confirming to us that for the most part developed nations are weak and should be sold and that emerging markets are strong and should be bought. No, this is not the first or the only tool that told us this same thing but it is one way in which we can systematically be long the best areas of the world and short the worst areas of the world. It also gives us a road map of where investors are putting their money and where they are withdrawing it.

Another point worth noting is that while we are starting to run this as a “standalone system,” the system represents only a part of our portfolio. In our trading and our newsletter model portfolio we use several different methods in order to build a less correlated portfolio trading across asset classes.

Happy Trading,

Disclaimer-We are long EWZ-Brazil, EWT-Taiwan, and EWM-Malaysia

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Title: Macro Trading Using Relative Stength

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