One of the best tools we have at our disposal is something called “relative strength.”

Look, you can’t beat the market, unless the investments you own ARE beating the market. In other words, hanging onto something “just because” will always drag down your overall performance.

We should not get “married” to a stock.

Relative strength “signals” are long-term in nature — they often last two years or more on average.

Relative strength “buy” signals: these investments tend to go up FASTER than the rest of the market — and when the market is in trouble, they often go down slower than the rest of the market.

Relative strength “sell” signals: tend to go up SLOWER than the rest of the market — but when the market gets shaky, these investments often go down faster than the rest of the market. In fact, they usually crash — badly.

So when we’re on defense (like we have been recently), we dropped all stocks or mutual funds with relative strength sell signals.

The stocks and mutual funds that we’ve held onto lately (while on defense) have been the stocks with the best relative strength. Yes, they can (and often do) go down — but they tend to go down slower than the rest of the overall market.

Tom

Thomas Mullooly
Mullooly Asset Management LLC
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