Stock selection after BREXIT
Technical analysis is constituted by several operative techniques. One of the most efficient, confirmed also by various academic studies, is the use of relative strength. Relative strenght is a stock selection process that argues that the strongest stocks are the best future performers. It is controversial because it negates the efficient markets hypotesis that states that past prices performance has no predictive value (1), but from my experience it works! One ot the first scientific studies has been published by Robert Levy in 1968 (2). His model, provides interesting insights also today. I generally use a modified version of his model to check the Relative Strenght of european stocks in the DJ Stoxx 600 Index.
The reason why certain titles keep for long periods an average higher Relative Strength over the time, if compared to their benchmark index, can not fully be explained. But it is reasonable to think that the stocks in question are always been object of some attention from the strong hands of the market because they have, for different reasons, some intrinsic characteristics of quality better than the rest of the listed securities.
I would point out at least three European titles that I had already selected several months ago, and that on the day after the Brexit have shown to be still the subject of great interest and significant demand from investors. They are Adidas, a German company that produces and markets a range of athletic and sports lifestyle products, the British Reckitt Benckiser Group, a manufacturer and marketer of health, hygiene and home products, and the France-based company Ubisoft Entertainment that is engaged in the development, publishing and distribution of video games.
You can see that all these three stocks have some common pattern. In the first graph window you can see the rising trend of the weekly prices of the last two years. On the graph that lies beneath the weekly prices, is plotted the Relative Strenght of the stock. The indicator is above the 50 (green line) and 200 (red line) days moving averages, and the inclination is positive. In the little graph on the left you can see how the price developed in the post Brexit day: a big green candle, that is the price opened very low, but the demand send it to a very high close.
In my experience, if the future prices of the next weeks remain above the minimum price indicated by the black arrow, it reasonable to think that the trend will continue. Otherwise, if the trend reverses or start a sideways trend but the relative strenght continues to rise, the stock can be hedged with his index in an equity market neutral strategy.
Mario Valentino Guffanti – CFTe – SAMT Vice President – Swiss Italian Chapter
Disclaimer: the above article is for general information and educational purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice.
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- C. Kirkpatrick – Investment and trading strategies – Pearson Education 2014 – p.22
- R. Levy – The relative concept of common stock price forecasting – Investor Intelligence – 1968