"Relative Strength as a Criterion for Investment Selection, Journal of Finance"

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This study examined the relative strength as a criterion for investment selection. Many authors in time past has conducted research on past price trend and patterns in predicting future price movement and come out with the report that successive stock market price changes are statistically independent upholding the random walk theory. It is in line with the above that this study sought to;
(i) evaluate the relationship between cost of a given security and proceeds which would have been received upon sale of the security, (ii) evaluate the concept of relative strength co-movement of stock price, (iii) evaluate the extent which historical market rank could be used to facilitate market timing.
The researcher adopted the ex-post facto research design and analysed the reported observation of the study variables extracted from the weekly closing prices on listed stock on the New York Stock Exchange. The scope of the study is on two hundred (200) listed stock and the period covered is two hundred and sixty (260) week period beginning of Oct 1960 and ends Oct 1965. Parametric statistic in form of simple linear regression, coefficient of correlation, moving average and hindsight were used for data analyses.
The key findings derived from this study include the following; The result of the correlation shows that intercorrelation or co movement of stock prices could conceal existing dependency in successive prices. That market ranks would probably be about the same no matter whether hindsight were used or whether sometime period prior to the period of this study were adopted as a standard of dispersion six month marketing performance. Average ranks are not affected by extreme price movement of one or more securities, but this is not true of average ratio. Average ranks and ratio support the concept of continuation of relative strength. The stock which historically were among the 10% strongest (lowest ranked) appreciated in price by an average of 9.6% over a 26 week future period while the stock among the 10% weakest ( highest ranked) appreciated in price an average of only 2.9% over a 26 week future period. There appear to be a good correlation between past and future performance grouping. The conclusion is that the relative strength tend to continue over the longer 26 period but does not appear to be the case fpr  the 4 week period. The apparent unpredictability of the short term result collaborate the result of serial correlation studies which show short term price movement to be random. The average price appreciation of the historical strongest securities shows the non-randomness in price changes. In Table 2 the (historical strongest) volatile stock group shows a wider dispersion of average 26/c rank, 26/c average ratio. The continuation of relative strength seem to be applicable to the market as a whole as well as individual securities. While table 4 and 5 indicate that the greatest 26 week rates of return are attain when selecting the 10% historical  strongest stock and the third divergence rank group: and the poorest return arise from selecting those stocks in the first divergence rank group. This means that stock on first divergence rank group do not appear to adhere very closely to the continuation of relative strength. Securities in the middle and third group are quite consistent in following the patterns forecasted by their relative strength ranks. The result implies that long term strong divergence ranks might be an effective means of forecasting long term market weakness. The validity of using market rank or divergence ranks to facilitate market timing must be of tentative nature.

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