Interpreting The Signals

One of the things we should look for as investors are stocks that have been doing worse than the market for quite a while, but give relative-strength BUY signals. This is a strong indication that the stock in question should eventually be a good performer for a long time. But how does one do a relative-strength analysis?

You can use Barron's to do a weekly relative-strength analysis by dividing the price of any stock you are following by the Dow Jones Average, and then plotting the answer on a point-and-figure chart. For instance, if the Dow Jones Average is 10,000 and the stock you are following is selling for $80 per share, dividing the 10,000 into 80 gives you 8.0 (after moving the decimal point). Then with the Dow rising to 13,000 (as it has) and if the price of the stock also rises to $91 per share, 13,000 divided into 91 would be 7.0, after moving the decimal. All of which suggests that although the price of the stock rose, its relative-strength fell, which tells us that the only reason the stock price rose is because the market also rose, and when the market goes sideways or falls someday, this stock will be a good candidate to go down as well.

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