SCTR, RRG, and Moving Averages

There is an infinite number of stocks that you may want to buy. So, how do you decide which is the best stocks to buy?

Warren Buffett recommends following three general rules when deciding which stocks to invest: (1) The company in question must generate good returns to the shareholders; (2) The management running the company must be reputable, honest, and capable of running the company; and (3) The stock must be reasonably priced.

On paper Buffett’s recommendations seem to be a sound and reasonable investment strategy. However, in the real world of investing this may not be practical. For one, unlike Warren Buffett most of us do not have unlimited funds to invest in all the stocks we like. Second, most investors do not have the discipline or the capability to maintain positions for an indefinite period.

Investing is both art and science. It is partly an art form as each investor has different risk tolerance levels, different time horizons, financial goals, needs, and wants. It is also a science because it requires a disciplined process to choose the right and best stock to invest in. You cannot randomly pick a stock and hope the stock will perform well.

The technical analysis investment discipline is one of many investment tools or processes by which a trader or an investor can use to help select the right stock, the right entry point, and the right exit point in the stock market. However, it may be difficult to know which technical indicators, oscillators, and tools to deploy. How do you know which is the best one or two or even three indicators to utilize to help you navigate through the stock selection process?

SCTR is a relative ranking system that incorporates six (6) key technical indicators covering 3 different time frames (long-term, medium, and short-term) including 200-day ma, 125-day rate of change, 50-day ma, 20-day rate of change, 14-day RSI and Percentage Price Oscillator. This technical ranking system uses a numerical score from 0.0 to 99.9 to rank every security within a market, sector, and industry against its peers. Stocks with SCTR ranking over 90 tend to be the strongest in the group and stocks with SCTR ranking below 10 are often the weakest. In general, an SCTR score between 40 and 60 is considered average. Signs of technical weakness begins as SCTR scores start to decline below 40. Signs of technical strength emerge when the SCTR scores move above 60.

The SCTR score considers multiple timeframes and puts more weights on the long-term technical indicators over the short-term indicators. The overall SCTR score is comprised of 60% weighting on the two long-term indicators (200-day ma and 125-day rate of change). The two medium-term indicators (50-day ma and a 20-day rate of change) accounts for 30% of the overall SCTR score and the two short-term indicators (14-day RSI and 3-day slope of PPO) are the remaining 10% of the total SCTR score.

The keyword is relative. SCTR score is a relative measure that compares one stock to other stocks within a specified sector, group, or market. Since this is a relative measure it does not convey how the group or sector is performing. That is if the group has performed poorly, and one stock stayed at the same level of performance, then the stock’s SCTR rank may rise relative to the other stocks within the specified group. Also remember, just because a stock’s SCTR rank rises does not imply that it is performing well. Rather it is implying that this stock is not performing as poorly as the other names within its universe.

When accompanied by other technical disciplines it can be a great way for an investor or trader to help identify technical leadership names that may outperform their peers based on the performances of the six technical metrics across three different timeframes. On the downside, it can also be a useful technical tool to uncover underperforming securities within a sector, group, or market.

Many leadership stocks will often have common technical characteristics. That is, they typically have high SCTR scores to their peers and most importantly, are in rising or sustainable intermediate-to-long term uptrends. By screening for stocks with relatively high SCTR scores, selecting stocks that are currently trading above their key moving averages (i.e., 20-day, 30-day, 50-day, 150-day, 200-day, etc.), and running a Relative Rotation Graph (RRG) this may help you narrowed your stock selection process down to relative strength leadership names. You do not need to have the unlimited resources of Warren Buffett and a long-time horizon to implement this simple and discipline investment screening process.

A review of the Dow Jones Industrial Average (INDU) currently shows 13 stocks that meet our minimum technical requirements of relative strength leadership names. Note that each of the INDU names has SCTR scores above 50 and are currently trading above their respective key moving averages (i.e., 20-day and 50-day ma).

INDU current relative strength leaders are: AAPL (SCTR score = 94.6), MSFT (94.0), HD (91.4), INTC (86.5), V (85.8), NKE (80.9), UNH (76.0), WMT (75.6), JNJ (73.4), PFE (73.0), CSCO (71.5), MCD (61.1), DIS (54.8).

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