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When discussing point and figure charts, we’ve always found that people understand them better when they’re compared to something they know. With week 5 of the NFL season about to get underway, we wanted to explain relative strength through a fantasy football analogy.
We need to begin by defining relative strength. Relative strength measures the performance of one security in comparison to another. This can be done with stocks, ETFs, mutual funds, sectors, asset classes and pretty much anything that has a price. We can compare stocks to stocks, stocks to the market, sectors to sectors, sectors to the market, or any combination of chartable securities. Relative strength is calculated by taking one security’s price and dividing it by another’s. We then plot that number on a point and figure chart.
Relative strength charts on buy signals (when a previous column of X’s are exceeded) indicate long term strength for the security. Relative strength charts on sell signals indicate just the opposite, long term weakness. Whether a relative strength chart is in a column of X’s or O’s gives us a shorter term outlook on relative strength. X’s signify strength, while O’s signify weakness.
Sounds great, but how does this relate in any way to your fantasy football team? Currently, Brendan needs a flex player because he drafted Toby Gerhart. Nothing against Toby, we’re sure he’s a great guy, but he isn’t performing like Brendan thought he would. He bought into the preseason hype even though this guy has little track record and is on an awful team in Jacksonville. The selection process of choosing a new starter for a fantasy team is similar to how relative strength is used to choose investments. Let’s take a look!
In Brendan’s league, a flex player can be a running back, wide receiver, or tight end. This is like how within the US market you can choose from any number of sectors to invest in.
So should he start a running back, wide receiver, or tight end at flex? His league gives points per reception (PPR), so that favors wide receivers over running backs and tight ends. We find this similar to testing the relative strength of sectors within the US market. Sectors displaying relative strength over other sectors and the broad market are targets for investing.
So Brendan knows that he wants to pick up a wide receiver to start this week. That’s good, but there’s a ton of them. Which wide receiver does he want? He’s going to stack all the available wide receivers by fantasy points scored. The top 4-5 names on the list should give him a good idea of which wide receivers have been outperforming their peers. This is similar to how we can compare all the stocks in a given sector to see which ones have the best relative strength vs. their peers. We can stack the stocks by relative strength buy signals to examine long term strength, and X’s to examine short term relative strength.
All that’s left to do is examine the top receivers. You can check out what team they’re on and who they’re playing this weekend, just like we would look into the fundamentals of a stock before making a decision to buy it.
Does using this method guarantee that the player Brendan picks up will score 30 points and lead him to victory this weekend? No but he’s done the work to stack the odds in his favor. The same message applies to stocks with great market and peer relative strength. Does it mean the stock won’t go down? No but relative strength does an excellent job stacking the odds in your favor.