When picking stocks, there is no sure way to know which stocks are going to be the big winners ahead of time.
Fundamental strength is one indicator. But other factors come into play, and sometimes unexpected events can hurt even stocks with strong earnings and sales.
In 2022, for example, the Russia-Ukraine war hurt companies that got part of their revenue from overseas. PepsiCo, and McDonald's fell in February 2022 despite steady sales and earnings growth. Defense stocks rose on new war contracts, although some had a mixed record of sales and earnings growth at the time.
The Relative Strength Rating
One factor that historically sets apart winning stocks is price performance over the long term. In other words, successful stocks are already performing relatively well before they make their major price runs.
The IBD Relative Strength Rating measures how well a stock is performing compared to all the other stocks in the IBD database. The rating goes from 1 (the worst performance) to a maximum of 99.
It takes the stock's price action over the past 12 months and assigns the number rating after comparing its performance against all other stocks. Recent performance is more important, so the rating gives more weight to the three most recent months of price action.
A perfect score of 99 shows a market leader that is performing at the top 1% of the whole market. The rating is updated every day, and in some cases can move abruptly.
IPO stocks cannot be measured because they've just started trading. But the RS Rating can pick up very quickly after the IPO stock has traded for five sessions, giving investors a better sense of its performance.
The RS Rating can be found in the stock quotes at Investors.com and many other tools. On IBD MarketSmith, it is possible to see how the rating has changed over different time frames, from one year back to six or three months back, to the most recent four weeks or even one week.
When the RS Rating for a stock improves, that can be a telltale sign of future gains. Look for a rating of at least 80 in stocks you consider for purchase. In studies of market winners by IBD founder William O'Neil, the most successful stocks had an average RS Rating of 87 when they began major advances.
Netflix Stock Was Price Leader Before 38% Gain
On May 18, 2023, Netflix broke out of a cup-with-handle base with an entry at 349.80. The cup started forming in early February. That was just around the time that the RS Rating jumped to 96 from 20 six months prior.
The week when Netflix broke out, the stock had a Relative Strength Rating of 94.
The relative strength line, which compares price action vs. the S&P 500, was also bullish, near new highs.
Netflix stock climbed as much as 38% to a peak on July 19. The RS Rating stayed high during the time, up in the 90s.
This article was originally published Aug. 18, 2023, and has been updated. Please follow VRamakrishnan on Twitter for more news on the stock market today.
