Ask Colin

Have you ever used a "RelStrenComp" for stock selection? Are there any benefits? Why do you prefer a hybrid approach?

I am not familiar with "RelStrenComp", but I assume that it stands for comparative Relative Strength. If so, I do not use it because there are some pitfalls. It must be done graphically, because point-to-point relative strength (comparing two dates) can be misleading - you need to be able to see whether relative strength is increasing or decreasing. It is also best to do it by calculating all the relative strength comparisons from a common base, or it is difficult to make comparisons.

However, my biggest concern with relative strength is that it is fine in a bull market, but in a bear market, a stock can have rising relative strength and still be falling in price. I think this is unacceptable for a private investor. Their capital is better off in cash. Of course, it is fine for managed funds, because they have a mandate to be fully invested and must get the best return they can - even if it is negative!

The benefits are that you have the strongest stocks. However, as I just said, this is not much good if they are simply going down less than the market is.

I don't so much use a hybrid approach as demand that the trend be up. Stocks I consider as investments must be either:

1. Already trending up - stage two of the value model or a mark up stage of the growth model

2. Breaking out upwards from an accumulation area (value model) or a consolidation area (growth model) on the chart.

In the second case, I will stage my way into the position as the trend is progressively confirmed.

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