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Computerized Investing > Second Quarter 2011

Using Relative Strength Analysis to Invest in ETFs

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by Wayne A. Thorp, CFA

In the February 2011 CI Online Exclusive, we introduced Leslie Masonson’s Stock Market Dashboard approach, which he discusses in his book “Buy—Don’t Hold” (FT Press, 2010). Masonson uses this dashboard, which is composed of eight indicators, to determine the future direction the market. Why is this important? According to research he cites, as much as 70% of an individual stock’s return is a result of the overall market trend. Masonson believes that his dashboard removes the guesswork from trying to predict where the market is headed. The February article can be accessed in the Online Exclusive archives at www.computerizedinvesting.com.

Beyond gauging the market’s trend, Masonson’s book also outlines his methodology for selecting individual investments—when the Stock Market Dashboard indicates that the overall market trend is favorable. He uses relative strength analysis (RSA) to choose exchange-traded funds (ETFs) from a diversified ETF universe. In this article we describe his methodology for selecting ETFs.

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