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 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 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) account 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 as a whole. That is if the group has performed poorly, and one stock stayed at the same level of performance, then it is possible that 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 do 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 to 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.
In our weekly technical reports (Lee Technical Strategy Newsletter) we have listed the top 10 SCTR ranked large-cap names and the associated charts on a weekly basis. The objective is twofold – to identify the outperforming large-cap names for the week but also to identify the sectors and industries that are consistently showing up on the weekly SCTR scans.
In a prior 4/07/20 Blog entitled - It’s All Relative – 2 S&P 500 sectors dominated the top 100 SCTR list. In fact, half of the top 100 ranked large-cap names were 30 Healthcare stocks and 20 Technology stocks. A deeper dive in the list also showed 5 of the top 10 SCTR scores were Technology names and 2 were Healthcare names.
Back in April 2020, it was reasonable to expect investors to focus on the Healthcare sector and specifically on the Biotechnology industry due to the Covid-19 pandemic. During this period of market uncertainties, many investors also felt comfortable with the classic defensive sector. Another explanation for the active interest in the Healthcare group is the favorable long-term demographics trend (i.e., aging population).
It was easy to understand why investors turned to many Technology names during the sheltered in place environment. However, we also suspect many investors continue to believe this sector is a structural growth industry and can also benefit from the wireless 5G technology revolution. Many investors turn to this sector because many Technology stocks can grow faster than the economy. Second, Technology is also one of the largest market-cap-weighted sectors within the S&P 500 Index (SPX) and is over 40% of the NASDAQ NDX 100 Index (NDX). Due to large market-cap weighting in the Technology sector, professional money managers needed to be weighted in some of the blue-chip Technology names.
A current update of the top 100 large-cap names ranked by SCTR scores as of 7/1/20 continues to show Technology and Healthcare stocks dominating the top 100 list. There are now 26 Technology stocks and 22 Healthcare stocks occupying the top 100 list. It is also interesting 11 Consumer Discretionary stocks have now moved into the list. Another 9 Industrials have also quietly slipped into the top 100 list. The improving relative strengths in economically sensitive industries is an indication of an economic recovery and hence an SPX recovery. Within the top 20 list it is more balanced with 7 Technology stocks, 5 Healthcare, 4 Consumer Discretionary, and 4 Telecommunication Services.