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Computerized Investing > Second Quarter 2011

Using Relative Strength Analysis to Invest in ETFs

PRINT | | | | COMMENTS (10) | A A   Reset

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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John from NJ posted over 3 years ago:


Dick from FL posted over 3 years ago:

Masonson has recently simplified the dashboard recommended in his book by reducing the number of indicators from eight to four. The details, including for backtest results, are given at his blog: http://www.buydonthold.com/category/blog/

The change has resulted in better signals and a simpler system.

Kenneth from CO posted over 3 years ago:

I've seen Masonson's new Dashboard. Guess you can make just about any trading system work using past history (data mining). We'll see if he needs to change this again in a year.

Joseph from NC posted over 3 years ago:

On ETFScreen.com, if the RSf is based on 6 month relative price change, why would sorting on it produce different rankings than sorting on the Rtn-6mo?

Yefim from CA posted over 3 years ago:

Very useful.

Thomas from IL posted over 3 years ago:

Excellent article. I already almost exclusively invest in ETFs - primarily for their diversification and liquidity. I've been ranking them using ETFscreen.com and attempting to pick a diverse bunch out of the top half of their RS rankings. I'm using a combination of MACD, moving EMAs, directional movement indicators, and Twigg's Money Flow to confirm entry/exit points. I've never noticed Masonson's section/dashboard there but I will go take a close look now.

Thank you.

Fernando from FL posted over 3 years ago:

In general, I consider ETFs to be the same as mutual funds: gambling vehicles designed to make money for the house, especially if you decide to hold them long term. Of course, the house in this case is everyone on the other side of the transaction from the investor.

James from OH posted over 2 years ago:

Not to detract from Masonson's work or strategy, I would offer these points.

* Just because an ETF has a high Relative Strength value doesn't mean its price is rising. - - - It could just mean it is not losing at much as the base it is being compared to.

* In a market with quite high correlation amongst investment alternatives (like the market over the last year or more), investing in several to many ETFs is superfuluous or near-redundant.

* As I and others have commented in posts elsewhere here in the AAII site (and as demonstrated in an article earlier in the year), while asset allocation does reduce risk, it does so only a little and it doesn't reduce it as much as it reduces total return.

* Much of the article above (and apparently Masonson's book) talk whether "the" market is rising or falling. Well, when one is addressing stock, bond, special metals, international, and sector ETFs, there are "multiple" markets. Not having read Masonson's book, I presume this means that his indicators (or muliple sets of indicators) need to be applied to each market to determine if it is rising or falling.

James from OH posted over 2 years ago:

One other point. I have not read the book. However, I suggest to any investor that before you adopt and use someone's investment strategy that you ask the developer / author two questions:

(1) If I had used your strategy during the financial crisis of 2008, how much would I have gained or lost?

(2) If I had used your strategy when the tech bubble burst in 2000, how much would I have gained or lost?

If the developer / author won't or can't answer those questions to your satisfaction, that should tell you a lot - - - and you should move on.

R from CA posted over 2 years ago:


I agree with some, but not all, of your comments:

**relative strength: it can be up when the price is falling, so sorting on percent price change gives the same ranking and lets you see what's up;

**Yes we are in a highly correlated market, but is it all that important for a momentum strategy when you are checking weekly?

**"while asset allocation does reduce risk, it does so only a little and it doesn't reduce it as much as it reduces total return."

That's a subjective tradeoff, varying from person to person. All I can say is I'm glad I loaded up on bonds to get close to the minimum variance point.

** Evaluating investment strategies by looking at 2000 and 2008 may not be informative if the strategy has been tuned to look good during those times

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