Over the years, I have often discussed our investment philosophy and the tools that we use here at Petra to implement our philosophy. One of the primary sources we use is Dorsey Wright, a firm that specializes in Point and Figure charting. Today, I would like to focus on Relative Strength Point and Figure charts.
As the name implies, Relative Strength is a momentum system that focuses on securities that have outperformed their peers in the past. Studies indicate that these securities tend to continue to outperform.
Some will remember from the videos on our website, a Point and Figure chart is a series of columns of X's and O's without regard to time. On a Relative Strength Point and Figure chart, a column of X's indicates that a security is performing better than what it is being compared to, i.e., a benchmark or peers in that security’s sector. Conversely, a column of O's indicates a security that is underperforming what it is being compared to. For Relative Strength, we often use the analogy of an arm-wrestling match.
As one would expect, we here at Petra Financial Solutions are most interested in sectors that have high relative strength compared to other sectors. We are looking to identify sectors that have given multiple buy signals and are in a column of X's on its relative strength Point and Figure chart.
Relative Strength/momentum is just one of the tools we use in the management of client portfolios. There are other sources that we evaluate, particularly late in the cycle (both in a recovery and in bear markets). We will return to discuss this in more detail in further posts.
Until next time, cheers!