investing with a top down relative strength approach

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 Learn how our Relative Strength strategy can help you understand your place in the investing landscape.  

“Relative Strength” speaks to the “strength” of one security “relative” to another. If Security A advances by more than Security B, then it’s showing positive Relative Strength. If Security A declines, but by less than security B, it’s still showing positive Relative Strength.

For example, look at the chart below, both the Energy and Consumer Staples sectors outperformed the S&P 500 in 2022 and would have made for better investment choices providing superior return

It’s important to understand that we use Relative Strength to reduce the risk of loss, as well as increase our upside potential. Weak sectors lag in rising markets and tend to lose more in falling markets. Weak sectors, once identified, should be avoided or only considered for short positions.

In this example, Staples were down about 7%. Relative Strength would still help you save money in this down market though, as Staples were stronger than the S&P 500 on a Relative Strength basis (Staples was down 7% while the S&P was down almost 19%).

As Charles Dow, the first Editor-in-Chief of the Wall Street Journal once said, “Sell your losers early and let the winners run.”

To do that, you need a process that allows you to see what other investors can’t – this is our edge. Successful investors know to track “smart money.” It’s institutional money (with hundreds of millions of dollars to invest) that is responsible for changes in the market. It’s institutional money that drives supply or demand for a security, and therefore price.

We all understand the basic forces of supply and demand. As demand for a product or service increases, so too does its price. Conversely, more supply for particular goods than interested buyers results in falling prices.

The same laws of supply and demand are what ultimately drive the prices of any market, sector, or security. Once understood, successful investing becomes a matter of finding a strategy that exploits this relationship… and that’s where Alpha Rose Capital shines the brightest.

We use a proprietary investment process based on complex algorithms to break down markets into supply and demand relationships that allow us to clearly see where institutions are investing and where they’re not.  It’s all about finding that price trend and riding it until our research and indicators tell us otherwise.

Meaning we first analyze each market’s strength against every other market – using algorithms to mathematically rank each market against the other. This guides the investment process as we can quickly see which of the six markets is strongest and deserves investment capital, and which markets are the weakest and should be avoided or shorted.

The next step in our process is to drill down deeper into each market and determine the strongest sector within each market. The graphic below compares the absolute performance of different industry groups (sectors) within the U.S. Equity Market vs. the S&P 500 Index.

Notice the S&P 500 (Green) has several other sectors that have better performances.  Beating the S&P benchmarket can be done. Look how Energy outperformed them all. We can apply any time range, and see sector rotations as they begin.

Above is a simple study illustrating the impact on a $100,000 investment made to the strongest asset class, the two top asset classes, owning all six major asset classes, and the results of being unlucky enough to own the weakest asset classes. The results are impressive.  This keeps us on the right side of market moves, for the bulk of the time we are investing.