Relative Strength: One Of The Strongest Tools

by | Jul 11, 2011 | Stock Market Comments

Weekly Commentary for July 11, 2011

Recently, in one of the larger retirement plans where I have many participants as clients, I sold one small-cap fund, but kept another.

But wait… last week, I wrote small caps are where we want to be in the stock market.
So why sell a small cap fund?

This is kinda important, so follow along.

One of the measures I use to manage your investments is something called relative strength.  This measures one investment against another, and also against the entire stock market.
We want to hang onto the investments with the BEST relative strength.  When the stock market gets sloppy, the investments that hang in a little better are those with good relative strength.

So, in this one retirement plan, there were two small cap funds,
Wells Fargo Small Cap and
Vanguard Small Cap.

The Wells Fargo fund had poor relative strength when compared to the Vanguard fund.  Yes, small caps are still in favor.  But when the market gets messy, the weaker relative strength names just gotta go.

With me so far?  Let’s take a closer look.

When the market began to slide in early May, the Wells Fargo Small Cap fund dropped *twice as far* as the Vanguard Small Cap.
Poor relative strength.

And when the market ran up at the end of June, the Vanguard Small Cap fund *gained twice as much* as the Wells Fargo Small Cap.
Good relative strength.

This does not make Wells Fargo Small Cap a *bad* investment. It’s actually got a pretty good track record over time.
It just has poor relative strength, since it is a small cap BLEND fund. The fund has a portion invested in small cap GROWTH and some money invested in small cap VALUE.

The Vanguard Small Cap fund is a pure small cap GROWTH fund.  And (at this moment) small cap GROWTH — is where we want to be invested (mid-cap GROWTH, too).

If you are relying on a blog post for specific investment advice, you are making a huge mistake. Please speak with an investment adviser before making ANY investment decisions.
If you do not have an investment adviser, we encourage you to contact Mullooly Asset Management at 732-223-9000, or through our website. Under no circumstances should the content discussed here to be considered specific investment advice.

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