Relative Strength Can Cut You

ChessNwine over at 12631 is absolutely correct to point out that you should be looking for stocks with good strength relative to the market to see which stocks you might want to buy when the market stabilizes. By “relative strength,” though, I’m guessing that he means “stocks that are not going down with the market.” Look at the two charts below. The first is BYI, which chessNwine purchased today. The second is of WMT. The bottom panels in both charts show the strength of the stock relative to the S&P 500. I added a 20-day moving average to the relative strength line to smooth out the daily moves. Note that in both charts the relative strength lines are turning up to new highs. However, WMT’s stock has turned over and is headed down, while BYI’s stock has traded sideways. A declining stock can have excellent breadth as long as it is not declining as fast as the general market. Remember to look for stocks that are holding up, as relying solely on a relative strength line, while it may look like a pretty woman, can cut like a buffalo.