The US stock market has been stuck in a bit of a not-too-impressive trading range this year.
As a result, investors may be curious to see where the strength has been in the market so far.
A useful tool that investors can use to make sure they are exposed to the strongest sectors of the market, is to view sector relative strength.
Comparing relative strength vs the S&P 500 Index, allows us to see which sectors are outperforming and avoid those which are not.
For those not familiar with relative strength, Investopedia explains:
Relative strength is a measure of the price trend of a stock or other financial instrument compared to another stock, instrument or industry. It is calculated by taking the price of one asset and dividing it by another.
Currently, the four strongest sectors are:
source: Sector SPDRs
Relative Strength Impact To Portfolio Performance
Why should you pay attention to relative strength?
By investing in the strongest performing sectors, an investor can enhance his or her long term portfolio returns.
I ran a quick backtest to show this:
-Buy (equally) the top 4 strongest S&P sectors, as measured by relative strength.
-Rebalance at the start of each month.
backtested data source: ETFreplay
By simply using relative strength indicators, investors can make sure they are investing in the strongest performing sectors and can avoid “unfavored” sectors.
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CEO & Chief Investment Officer
featured image: Wikimedia Commons/Jnadler1