Introduction: The Problem

From time to time, a lucky investor will, by chance, time a particular trade perfectly. They get in
at the bottom, get out at the top, and walk away with profits that exceed their expectations.
I’ve done it, more than once.

And speaking for myself, the payoff from such a trade has always been about more than
money. It’s also been about the rush.

Watching the value of your investment skyrocket feels amazing. We reflect upon it. We brag
about it. And most of all, we convince ourselves it makes up for past losers.

If you find these reactions overly emotional ... you’re right.

Most stock market investors fail to perform as well as they could because they’re in thrall to the
memory of that one huge winner they timed perfectly that one time.

The power of this emotion is the reason casinos stay in business. Folks winning money at the
tables experience a chemical neurological rush. Then they continue going back to the casino to
relive that moment. It’s a dangerous trap, and every investor has fallen into it at one time or
another.

What’s truly ironic is that the impact a big winner has on your overall investment portfolio can
be surprisingly minimal. Even an earth-shattering return represents just one out of many stock
positions you’ll take in your investment lifetime.
True, certain investments could have changed your life, had you sunk enough money into them.
But you can’t risk your whole net worth on any single hot idea, no matter how excited you feel.
The fun way is not the realistic way to approach the market.

Now, few people are so foolhardy as to invest a huge percentage of their capital into one play.
They understand the need to hedge off some of the risk by diversifying among multiple
positions.

And yet … the siren song of those potentially huge winners is always in their ears.

The upshot is that every investor confronts a dilemma. How to stay invested in opportunities
for huge (even life-changing) gains … and yet stay hedged and safe?

There are two ways to square this circle—a wrong way and a right way

Risk Disclaimer

There is a very high degree of risk involved in trading. Past results are not indicative of future
returns. [Link] and all individuals affiliated with this site assume no responsibilities
for your trading and investment results. The indicators, strategies, columns, articles and all
other features are for educational purposes only and should not be construed as investment
advice. Information for futures trading observations are obtained from sources believed to be
reliable, but we do not warrant its completeness or accuracy, or warrant any results from the
use of the information.

Your use of the trading observations is entirely at your own risk and it is your sole responsibility
to evaluate the accuracy, completeness and usefulness of the information. By downloading this
book your information may be shared with our educational partners. You must assess the risk
of any trade with your broker and make your own independent decisions regarding any
securities mentioned herein. Affiliates of [Link] may have a position or effect
transactions in the securities described herein (or options thereon) and/or otherwise employ
trading strategies that may be consistent or inconsistent with the provided strategies.
Chapter
01

The Wrong Way: Traditional “Diversification” Is

a Poor Solution
The most important part of investing is risk management. And “rule one” of risk management is
to spread out the risk—to “diversify.”

But while the idea behind diversification—don’t put all your eggs in one basket—sounds great
in theory, it doesn’t work all that well in practice.

The typical investor achieves what he considers to be diversification by handing his capital to a
fund manager, who then spreads it around. But here’s the rub: the vast majority of fund
managers underperform the stock market averages.

So, yes, in their hands your account is certainly diversified. But your returns are anemic, non-
existent, or negative. They are almost certain to underperform their benchmarks.

Table 1, below, shows the percentage of active-fund managers that failed to outperform their
benchmarks. This information is so shocking you might think you’re misreading it.
Source: S&P Dow Jones Indices LLC using SPIVA U.S. Scorecard

The study shows that in the 3-year period ending June 30, 2018, the S&P 500 large-cap index
outperformed 78.64% of large-cap fund managers!

Note the right-hand column displaying 15-year performance (a timeframe widely considered a
“complete market cycle”). It shows that roughly 92% of large-cap managers, 95% of mid-cap
managers, and 98% of small-cap managers underperformed their benchmarks over an entire
market cycle.

More than half (59%) of U.S. equity funds either folded or merged during the 15-year time
frame, which is something they do after poor performance makes it too hard to attract new
investors.

There’s another problem with diversification as it’s commonly practiced. To really feel
confident your capital has been allocated to the right assets, you would need to understand
those assets. Responsible due diligence demands nothing less.

You would need to be a semi-expert in the offerings of all kinds of industries—technology

stocks, financials stocks, energy stocks, etc.
And you would also need to develop a feel for the strengths and weaknesses of different size
stocks (smallcap versus mid-cap, etc.). And you’d need a feel for value stocks versus growth
stocks, etc. That’s a tall order, to say the least!

But take heart…

You can make the right investment at the perfect time. And you can even invest using 100% of
your portfolio in this investment.

Best of all, you can do it without having to give up the safety of REAL diversification.

You can avoid the anxiety of having to frequently search for a new investment vehicle. I’ll
provide you with this solution, which is used by the some of the savviest investors in the
world—investors who have the capacity to move global market prices.

But I can only do so on one condition. You must be willing to completely change the way you
look at the stock market.

Before you read one more paragraph, I’ll need you to clear your mind and to begin thinking
about the stock market in a new way. Please do not glide over anything you read here because
you think you’re reading something you already know.

There’s not much of a learning curve here. Just a single powerful idea.
Chapter
02

The REAL Solution: “Factor Investing”

To repeat, it is possible to make one investment and yet remain 100% diversified. I know that
seems too good to be true, but it is true.

We’re going to perform this miracle via a shift in our investing “viewpoint.” Here’s what I
mean…

Most investors regard the “unit” of investment to be “the stock,” or “the bond,” or “the ETF.”

Now, of course we’re going to invest our capital in stocks and ETFs. But we’ll no longer consider
those assets to be the “unit” of our approach. Instead, we’re going to make the unit of
investment be something we’re going to call “the factor.”

A factor is simply an attribute—such as the quality or size of a company—that aids the investor
in categorizing potential risks and returns.

“Factor investing” is a strategy where a group of stocks is chosen based on certain attributes
that correlate with outsized stock market returns. A factor, which is basically an investment
approach, can be timed, just like you can time entry into a stock or a fund.

Various factors go through periods of outperformance and underperformance. In this report, I’ll
show you the factor that almost always outperforms, and yet goes through the shortest periods
of underperformance.

Let’s begin at the beginning.

Most of the investment world divides the stock market into two groups. The first group is
“growth stocks.” These are defined as companies growing their earnings at an above-average
pace. Then there are “value

stocks,” also called “undervalued stocks.” These are defined as stocks trading at a lower price
than is indicated by the company’s “fundamentals.”

These two groups represent factors at the most basic level.

One group will perform better than the other, as a long-term trend, depending on corporate
America’s earnings growth rate. Value stocks tend to outperform growth stocks when
corporate earnings are accelerating. Growth stocks tend to outperform when corporate
earnings are decelerating.

The stock market is broken down further into more narrow groups, or factors. For example,
there are factor fund managers who only purchase the stock of companies that have been
buying up shares of their own stock—those celebrated “buybacks.”

Another factor fund manager might manage a portfolio of “low-volatility” stocks. Yet another
might invest only in so-called “high-quality” stocks.

At True Market Insider, we also begin our investment selection process by first committing
ourselves to one particularly successful factor investment strategy. The factor we focus on is
called “momentum stock investing.”

I’m going to jump ahead for a moment while I’m on the topic of the breakdown of the stock
market. The triangular image below represents the stock market.

All stocks are classified as growth or value. Momentum stocks—the type of stocks we’re about
to discuss further—can be either growth stocks or value stocks, but they’re usually growth
stocks.
A “momentum investor” (the factor is “momentum”) invests in momentum stocks, which are
defined as “stocks that are currently outperforming.” That is, they are going up by more, or
down by less, than the stock market averages. When you consider that value stocks are, by
definition, stocks that have fallen below their true fundamental value, it makes sense that they
are rarely momentum stocks.

Let’s narrow the scope a little more. “Relative strength” stocks are a specific type of
momentum stocks. Relative strength is a more sophisticated calculation than mere momentum.
I’ll get into that later.

But first, back to business…

Table 2

As mentioned, we can time investments in a particular style of investing. We can buy into a
strategy as it begins to outperform, and then ride the wave of its outperformance.

And we can buy into a factor as it begins outperforming other factors. So that solves the
problem of diversification among multiple stocks. Individual stock risk is diversified away
because we’re basing our trade choices on the fact that a particular factor (not a particular
stock or ETF) is outperforming.

Forget Everything You Know About the Stock Market

Chris Rowe reveals the truth about the market that no one else will tell you…
And how it could give you a massive edge in the market.

Watch the Video Here

Chapter
03

The “Big Mo”: Momentum Investing

Momentum investing is a strategy that gives extra “weight” (that is, it “overweights”) to areas
of the market that have performed well in the recent past.

The idea is to regularly rebalance your investment portfolio, or your investment model, so that
you always own the stocks that performed best over a given time frame.

Investors start with a universe of stocks like the S&P 1500. They use a “moving price
performance window” (usually 6 or 12 months) to rank the 1500 stocks in order of the 6- or 12-
month performance.

The model/portfolio might own the top 20% stocks with the best performance over that time
frame. The same approach can be used to rank every sector of the stock market using the same
method.

Our factor has already proven to show above-average risk-adjusted returns. Most studies show
that momentum performs approximately 33% higher than the benchmark.

(If you continue reading our free e-letter, True Market Insider, or subscribe to our paid
programs, you’ll build a solid education about momentum investing and relative strength.)

By focusing on momentum as our favored factor, and by selecting our equities from a universe
of stocks (or ETFs) that are showing high momentum, we are trading with “the wind at our
sails.” It’s like we’re beginning the race with a head start.

Why is this so important and powerful?

For one thing, it is purely objective, and doesn’t require an extensive knowledge of each stock
in the universe. What’s more, because it is “rules based,” it takes much of the emotion out of
your investing decisions.

Finally, because momentum investing is adaptive in nature, it spares you from having
constantly to try to hit a moving target. That is, you don’t have to adjust your investment
strategy as different groups move into and out of favor.
You don’t have to learn about energy stocks when they are hot … or technology stocks when
they are hot

… or small caps when they’re in favor … and so on.

No more guessing and hoping. Instead, just buy what’s working and, when it stops working,
simply swap it out for something else—anything else—that is working.

Before going on, let me offer one caveat…

To get maximum value from this method, you must reconcile yourself to the following reality.

No strategy outperforms 100% of the time. Momentum investing is no exception.

As a professional investor who has worked for thousands of other investors since the mid-
1990s, I can tell you: a certain percentage of folks will abandon this approach the moment it
begins to underperform.

It doesn’t matter if they’re shown 100 years of history proving that the approach will soon start
outperforming dramatically once again. They panic and sell.

This lack of discipline or patience is one of the biggest pitfalls investors face. And it does more
than merely dent their long-term returns.

That’s because they usually decide to abandon the approach just when momentum stocks are
nearing major lows—at the exact moment when they could have begun capturing their greatest
gains!

The long-term effect is an investor repeatedly selling at low points. It’s the reason individual
investors dramatically underperform the stock market averages over time. It’s why (as we saw
earlier) more than 92% of professional fund managers can’t seem to beat the major market
averages each year.

When compared to other factors, momentum investing has superior long-term performance. It
also seems to move out of favor less frequently, making for a strong, investable, long-term
trend.

In 2016, momentum investing experienced underperformance. In the first half of 2017, it

resumed its outperformance once again.

Now let’s discuss a more accurate and sophisticated way to identify stocks that are
outperforming.
Chapter
04

Going Deeper: Relative Strength Investing

There are many ways to apply momentum investing and there are many different styles of
momentum investing. The style of momentum investing that we choose to employ is called
“relative strength investing.”

Relative strength (RS) measures the price performance of a stock versus a market average, or
versus a particular universe of stocks. A stock’s relative strength can improve under two
scenarios: if the stock rises more than the market during an uptrend, or falls less than the
market during a downtrend.

Relative strength can also be used to measure the performance of any primary security or
group of securities against any secondary security or group of securities. For example, investors
track the performance of financial stocks versus energy stocks by measuring the performance
of the ETF “XLF” versus the ETF “XLE.” But that’s a story for another time.

Extensive research shows relative strength is the lowest-risk type and most effective form of
momentum investing. It tends to have the highest risk-adjusted returns.

In fact, of the hundreds of studies I’ve seen on momentum investing or relative strength
investing, the RS models outperformed the stock market benchmark by 3.5% – 6.5%,
annualized.

It’s the most adaptive tool we’ve found to identify the strongest trends from the weakest
within an investable universe. At the same time, RS is responsive enough to allow for rotation
out of bad groups and into good groups of stocks when market trends necessitate. In short,
relative strength attempts to minimize exposure to underperforming positions, while letting
profitable positions run.

The relative strength approach I’m going to teach you is designed to target medium to longer-
term themes of outperformance.

Before we jump into that, I’ll highlight one exchange-traded fund (ETF) that focuses on
momentum stocks. This fund can do all the work for you so that you can become a “momentum
investor” in a matter of seconds.

I think it’s one of those ETFs many investors will look back on in a few years and say: “Now, why
the heck didn’t I just put all my money in that? It would have changed everything.”
After I quickly showcase this momentum ETF, I’ll give you a step-by-step approach to finding
the type of stocks the fund tends to invest in.

This way you can invest in these stocks and in relative strength stocks on your own, without the
help (or restriction) of a fund manager. This should offer you much more flexibility to create a
strong portfolio that better matches your specific investment lifestyle.

Finally, I’ll explain the momentum tsunami. If this is what I think it is, then it’s a major game
changer for anyone who understands it.

Chapter
05

Our Recommended Momentum ETF

By owning a fund that does the work for you, you can be a passive investor, paying only 15
basis points as an expense fee, with exposure to relative strength stocks.

iShares MSCI USA Momentum Factor ETF (Symbol: MTUM)

iShares MSCI USA Momentum Factor is one of the most liquid and popular momentum factor
funds, with more than $8 billion in assets under management.

It owns 100–350 stocks. The Fund seeks to track the investment results of the MSCI USA
Momentum Index (the “Underlying Index”), which consists of stocks exhibiting relatively higher
momentum characteristics than the traditional market capitalization-weighted parent index,
the MSCI USA Index, which includes U.S. large and mid-cap stocks.

Here’s a link to their website where you’ll find a prospectus and other important documents..

The fund is highly diversified among over 100 stocks. However, there can be significant
concentration in any of the 11 sectors (major industry groups) of the stock market.

For example, if Technology stocks and Financial stocks are the two strongest sectors of the
stock market, more than half of this fund might be concentrated in just those two sectors.
Other sectors of the stock market may have zero representation in this fund. And that’s the
whole point of the fund. It avoids the areas that are not showing above-average performance.

We believe this fund is among the strongest funds to invest in on a risk-adjusted basis at this
point in time. Rather than quote the price of the fund, we are saying that we believe the fund
will continue to be among the best performers for several years to come. Long-term investors
seeking tactical asset allocation should consider this as a major holding.
Tactical Versus Strategic Allocation

Tactical asset allocation is an active-management portfolio strategy that shifts the percentage
of assets held in various categories to take advantage of market pricing anomalies or strong
market sectors. This is the opposite of “strategic asset allocation.”

In strategic asset allocation, the target allocations have nothing to do with the strength of the
investment. Instead, they depend on a number of factors— such as the investor’s risk
tolerance, time horizon and investment objectives.

Strategic asset allocation is compatible with a “buy and hold” strategy. This report highlights
why tactical asset allocation is a superior strategy for investors who want to pay attention to
their investments.

Chapter
06

The 5 Steps: Finding “Perfect Investments” on

Your Own
Investors can easily forget how good we have it now. We get to use exchange-traded funds,
which can be a major headache remover.

That said, there are two big benefits to applying the RS/momentum approach to individual
stocks instead of groups of stocks (funds).

For one thing, upside moves can be much bigger for individual stocks than for funds.

Also, you can take full control of how much exposure you have to various types of stocks. You
can create a more customized portfolio and not be chained to the rules followed by a fund
manager.

This freedom is important, because once a fund manager states the rules they will follow, they
can’t deviate from that set of rules, even if it becomes glaringly obvious that there’s a better
place to be invested.

For example, the iShares MSCI USA Momentum Factor ETF (Symbol: MTUM) can have several
hundred ETFs in it. I certainly don’t suggest that you over-concentrate your portfolio. But you
should have the ability to diversify as little as or as much as you feel comfortable doing. You
should be able to weight a portfolio the
way you want to weight it, but using RS momentum stocks.

Perhaps you do love the idea of investing in groups of stocks, like ETFs, but would like to build a
portfolio of more narrowly focused ETFs.

For example, instead of investing in the major “Technology” sector through a fund like SPDR
Technology (Symbol: XLK), you want exposure to the strongest sub-sectors within Technology.

In that case, you’d want to know if there’s more relative strength in an ETF that focuses on
Software stocks, Internet stocks, Computer stocks or Semiconductor stocks.

Your investment account may experience significantly stronger performance if you focus on a
small number of sub-sectors instead of one dynamic momentum fund like iShares MSCI USA
Momentum Factor ETF (Symbol: MTUM).

There are two things to think about when looking at a relative strength chart:

NOTE: We always want to be trading in the direction of the trend. So if we are experiencing a
long-term bull market (uptrend), then we are looking for bullish (upside) plays. This is when
we’d look for stocks on a “relative strength buy signal” (higher highs). During bear markets, if
we were to find downside plays, where we want to profit from a decline using a put option or a
short sale, we would find stocks that are on “relative strength sell signals” (lower lows).

1. Is it going up or down?
2. Is it on a buy signal or a sell signal?

Not surprisingly, the highest success rate comes with stocks that have relative strength charts
that are both going up and on a buy signal.

In a moment, I’ll introduce you to a website where you can find out if the stocks you own, or
are considering, are on relative strength buy signals (or sell signals). This takes just a few
seconds per stock.

Let’s start by looking at a relative strength chart. It’s simply a chart that tells you whether or not
a stock is outperforming the wider stock market.
NOTE: The charts below were created by changing the “Type” setting to a line chart. We think
this is easier for most people to follow than the “candlestick” default setting.

As we mentioned earlier, outperforming means: the stock is either going up by more, or going
down by less, than a benchmark, say, the S&P 500. The stock can also be going up when the
stock market is going down.

A relative strength chart looks just like a stock chart. It’s simply data points plotted on a chart
and a line connecting the data points.
Chart 1

Chart 1 is an ordinary price chart of Microsoft in the year 2012.

Obviously, this stock chart is a pictorial record of Microsoft’s price history, with the price of
Microsoft seen on the y-axis (the right-hand side) of the chart.
Chart 2

Chart 2, on the other hand, is a relative strength chart of Microsoft as compared to the stock
market (S&P 500).

Chart 2 does look very much like Chart 1, but it illustrates something very different—namely,
how Microsoft’s individual performance compares to the performance of the stock market over
an identical span of time.

You’ll never see “price,” as such, listed on a relative strength chart. Instead, the values on the y-
axis are a measure of this individual-stock-versus-market outperformance. They tell us where to
plot daily points on the chart as Microsoft’s performance advances or declines relative to the
market.

What’s important on a relative strength chart is the direction and the signal (buy or sell) the
chart is giving us. When the line is declining, it means that Microsoft is underperforming the
stock market. When it’s advancing, it means Microsoft is outperforming the market.

Now, this next point is very important…

The RS chart cannot tell us whether Microsoft itself, or the stock market itself, is advancing or
declining. For that information, we’d need to look at Microsoft’s price chart or the market’s
(S&P’s) price chart.

Relative strength charts are powerful precisely because they show us at a glance how one asset
is performing (and has performed) relative to some other asset.

The RS chart for Microsoft is in decline, and it had been on a sell signal since April 2012.
Knowing this, we would have assumed the stock was more likely to decline than advance.

Take a few moments to compare those two charts again. Notice how, in August, the Microsoft
price chart (Chart 1) broke above the three highs set in June and July.

The fact that the stock’s price was about to break above past highs would signal to the typical
chartist that Microsoft might have recovered from its March-to-August downtrend.

Based on that assumption, the typical chartist might have decided to hold the stock (if they
already owned it) or to buy the stock, thinking it would continue higher.

But a RS analyst/investor would have steered clear of the stock because the RS chart told a
different story.
The RS chart (Chart 2) of Microsoft versus the S&P 500 did not make a new higher high above
the June and July levels. This indicated that, while Microsoft itself did advance above recent
highs, the advance was less strong than that of the S&P 500. This was a big red flag.

The chartist (or fund manager) applying relative strength analysis would have avoided
Microsoft since it put in a “RS sell signal” in early April (making lower lows), and that sell signal
never reversed back to a buy signal for the rest of the year.

It’s up to you whether or not you want to stick to strict rules and sell out of a bullish position
when the stock/ ETF moves to a RS sell signal, versus the stock market.

The more experienced a technical analyst is, the more facts he or she will consider when
determining their actions. But please be advised: too many variables can actually disrupt an
otherwise simple and effective investment approach.

You’re going to use five easy steps to determine which stocks are the strongest and most likely
to earn you outsized gains.

Before entering a position, we’ll want to see three positive key circumstances. However, we will
be flexible on one of them (more on this in a minute).

Whether or not you stay in a position when one of the three key circumstances changes will
depend on whether or not you’re sticking to a strict rules policy.

Here are the five steps.

Step 1: Go to the Sector Prophets website.

Step 2: Enter stock/ETF symbol.

Step 3: Determine “Sector Relative Strength” (“X” represents strong, while “O” is weak).

Step 4: Determine “Market Relative Strength.”

Step 5: Determine “Peer Relative Strength.”

Step 1: Go to the Sector Prophets website.

NOTE: Sector Prophets is one of True Market Insider’s Premium services. As a new reader, we
are giving you free access to one part of the Sector Prophets website. The rest requires a
subscription for access. We want to make it easy for you to significantly reduce your risk while
keeping you in the strongest areas of the stock market. We believe that once you see how well
this new RS technique performs, you’ll use a small part of your profits to treat yourself to a
subscription to Sector Prophets. For now, you can use this link to as you follow along.
Step 2: Enter a stock/ETF symbol in the field in the top right corner. You do not have to be a
subscriber or be logged in to use this feature.

Step 3: Determine “Sector Relative Strength.” You’ll notice the first line displays the sector (or
peer group) to which the stock/ETF belongs. For example, Microsoft is a member of the
Software sector. (See below.)
Remember, we want to focus only on stocks that are members of sectors that are relatively
strong, when compared to the stock market. This is key, because we want to have our
investments “swim with the current.” A weak stock in a strong sector is still likely to experience
some strength by virtue of being part of a strong group. On the flip side, even a strong stock
tends to struggle when it’s a member of a weak sector.

Here’s why this is true.

When a stock is a member of a strong group—as Microsoft is to the Software sector—the

strength of the group tends to push the stock price higher, regardless of the merits of the
individual company.
To understand why this is so, remember that index-fund traders and sector traders dominate
the stock market. It is their buying that drives prices up, and their selling that pushes prices
down.

And once those heavy-hitters determine that a sector (such as Software) is headed higher, they
swoop in and buy any stock that is a member of the Software sector index. They usually don’t
care whether a given company is solid or not. They buy the stock because its peer group is solid.

Now, large investors and institutions have so much investment capital to deploy that they
cannot possibly deploy it on any one individual stock.

That much capital flowing into a single stock would drive up the price. This creates two
problems for fund managers. For one thing, they themselves would have to pay that higher
price as they accumulate their position. And for another, as they exit their position, that much
capital flowing out of the stock would drive the price down. These problems combine to thwart
the managers’ intention of “buying low and selling high.”

The upshot is that institutions need to spread their capital around the entire sector. And as they
spread it around, some will invariably flow into—and boost the price of weaker stocks.

And that’s why we always want to stay invested in stocks that are members of sectors showing
relative strength. Keep that fact in mind, and you’ll be smarter (and more successful) than most
investors.

For sectors, strength or weakness is indicated on this website with either an X or an O.

An X signifies that the sector is outperforming the stock market, while an O indicates that the
sector is underperforming the stock market.

At the time of this snapshot, the Software sector was relatively strong, as indicated by the X.
The sector is outperforming the stock market. Therefore, we are comfortable owning stocks in
the Software sector as long as those stocks are showing “market relative strength.”
Step 4: Check to see if the stock’s “market RS” is strong or weak. If the condition is “strong,”
then the stock is on that “relative strength buy signal” we discussed earlier. This means that the
stock is outperforming the stock market benchmark—in this case, the S&P 500.

Before we move on to our fifth and final step, let’s pause for a second and review what we’ve
just accomplished by this point.

We have established that the stock is a member of a strong group, and that the stock is
outperforming the broader market. These are the two key factors we want to see before
entering any stock position.

That’s because stocks that are showing positive relative strength versus the stock market tend
to outperform for long periods of time.
In fact, as I've mentioned, hundreds of studies show the RS models outperforming the stock
market benchmark by 3.5% – 6.5%, annualized.

It’s best to think of RS stocks as residing in a class of their own. Like any other styles of stocks,
RS stocks tend to go through periods of outperformance and temporary periods of
underperformance.

Sometimes RS stocks, as a group, outperform by a lot and other times by a little. RS investors
tend to enjoy periods when RS stocks, as a group, are showing maximum strength.

In other words, relative strength, as an investing approach, does trend. That means the
outperformance of a stock or ETF tends to continue for a significant period of time.

Over long periods of time, portfolios of RS stocks tend to show superior risk-adjusted returns.
These lengthy time frames include complete stock market cycles, where RS stocks cycle in and
out of favor.

Step 5: Check to see if the stock is also outperforming its peer group (its industry group). This is
called “peer relative strength.” In the case of Microsoft, this would be the Software sector.
At the time of this snapshot, the stock is weak when compared to the rest of the Software
sector. That might seem amazing, considering how strong we know Microsoft itself to be, based
on the stock’s price chart (Chart 1, above).

I’ve decided to put this step last, even though “Peer RS” appears before “Market RS” on the
Sector Prophets website. The reason I’ve made this the fifth step is because a weak peer RS is
not a deal breaker when we’re deciding to stay in the stock or not.

We can’t have too many variables determining whether or not we will be in a stock because
they all tend to change, and too much activity can have a negative impact on performance.

But investors who want to be a bit more active and a bit more strict on what they own should
definitely take peer RS into account.
Some RS investors prefer to enter into stocks showing both strong “market RS” and strong
“peer RS.” If the stock then experiences weak peer RS, the investor might stick with it for some
time, while setting some secondary parameters that can act as confirmation that it’s time to
exit the position.

If those secondary parameters then reveal signs of weakness to the investor, he or she would
then decide to exit the stock.

These five steps are the most logical for determining the “RS health” of a stock. To sum it up,
we’re looking for stocks:

1. Residing in sectors that are outperforming the stock market …

2. While also outperforming their peer (industry) group …
3. And while also outperforming the stock market itself.

These are the types of stock that superior investment models own.

Free Video Report: Discover the strategy used by the richest investors in the world to produce
more, bigger wins... with greater consistency than you ever thought possible!

Start Watching Here

Chapter
07

The Rubber Meets the Road: Some Real-World

Examples
Chart 3, below, shows the relative performance of the iShares Nasdaq Biotechnology fund (IBB)
versus the S&P 500 ($SPX).

You can create a relative strength chart, like this one, using most charting services. The service
we used for this one is [Link]. All you have to do is enter the primary symbol (in this
case, IBB) and the secondary symbol ($SPX), separated by a colon.

Example: IBB:$SPX

RS Trend Example #1: Relative Strength of Biotech vs. the Stock Market.
Chart 3

Remember, this is a relative strength chart. We cannot determine, from this chart alone,
whether or when IBB itself was advancing or declining.

Likewise, we can’t tell whether or when the broader stock market was advancing or declining.
We can only determine when IBB was doing better or worse than the stock market.

For the first half of 2002, the trend was Biotech (IBB) underperforming the stock market (S&P
500).

For 12 months beginning in mid-2002, the relative strength trend between the two was IBB
outperforming the stock market.

For nearly four years, from late 2003 through mid-2007, the relative strength trend was IBB
underperforming the stock market. Again, for all we know, IBB was going up the entire time and
all the IBB owners were happy to be in a “winner.” But it was underperforming the stock
market, so the RS chart was headed lower.

For most of the time from mid-2007 to 2015, Biotech was outperforming the stock market.

After a brief period of underperformance in 2009, IBB barely outperformed or underperformed

the stock market until 2011.

In August 2015, there was a clear reversal, where the relative strength chart put in a relative
strength sell signal, telling investors the RS trend was over for the time being.
The point of this example is to show how relative strength relationships tend to trend. That’s
why identifying new trends of positive or negative relative strength can be so effective. We can
identify these new trends of outperformance early in the game, and then we can ride those
trends, often for several years.

On December 15, 2014, I wrote an article about buying stocks when the stock market dipped.
The point was not only to buy stocks on the dip, but to buy the sector that was relatively strong.

Chart 4

Even after the clear relative strength sell signal, in August, the Biotech sector was still way
ahead of the stock market in terms of comparative performance.

RS Trend Example #2: Relative Strength of Financials vs. the Stock Market.
Chart 5

The next example is a relative strength chart of the Financials sector (XLF) versus the stock
market ($SPX). This Financials sector fund consists of stocks like J.P. Morgan and Bank of
America.

I’ll abbreviate this discussion by repeating the obvious. Relative strength relationships do trend.
And the fact that they trend is of more than theoretical importance.

In 2007, I made myself and thousands of investors huge profits by taking bearish positions on
financial stocks. I continued taking these positions through 2008. I used relative strength
analysis to determine the weakest sectors of the market.

With 20/20 hindsight, it’s easy to see that Financials were obviously going lower. But … if it
were that obvious to everyone, then everyone would have gotten much wealthier from 2007 to
2009.

I randomly chose the two sector funds you just read about—and now I’m randomly choosing
Apple Inc. — because they’re well known. But I encourage you to enter the symbols of any
stocks or ETFs and convince yourself that RS trends almost always exist. Doing so will almost
certainly boost your confidence in this investment approach.

RS Trend Example #3: Relative Strength of Apple Inc. vs. the Stock Market.
Chart 6

Again, it looks just like a stock chart. And the principle behind analyzing a relative strength chart
is the same as the principle behind analyzing a stock chart: higher highs mark a buy signal and a
new uptrend.

First, from 2001 to 2004, Apple had approximately the same performance as the stock market,
as the RS chart moved sideways.
Chart 7

You can see, in late 2004, this relative strength chart moves up, making new highs and even
breaking above the old high, set in 2000 (not shown). This trend of outperformance continued
through the end of 2005. It underperformed for six months and in mid-2006 resumed its
outperformance until the end of 2007.

As we begin to conclude this report, let’s look at some historical data that illustrate a 90-year
period during which the power of relative strength is undeniable. What you’re about to read is
just a snapshot. But online you can easily find hundreds of studies that prove the superiority of
this approach.

Chapter
08

We’ve Built Our Financial Lives on Relative

Strength Investing
When it comes to relative strength investing, I have always been willing (and eager) to put my
money where my mouth is by making it the cornerstone of my investment philosophy.
That’s because on a risk-adjusted basis, relative strength investing is among the highest-
profiting investment styles in existence. In fact, no other approach has been more thoroughly
researched and more conclusively proven to outperform.

While different stocks or groups of stocks move in and out of favor, depending on the evolution
of economic factors, relative strength analysis keeps investors in stocks and funds that are best
capitalizing on the current market environment.

That means the approach is adaptive in nature. And that means it is always the right
investment, by definition.

Relative strength measures the price performance of a stock versus a market average, or
against a “universe” of stocks. As you’ve seen, a stock’s relative strength improves when its
price:

1. Rises more than the market, or …

1. Falls by less than the market.

As we’ve discussed, a stock’s outperformance is a trend that tends to stay intact for some time.
Therefore, once a stock meets your criteria, it typically stays on your list of investable stocks (or
in your account) for a significant time period.

Once the stock no longer displays the characteristics of those that tend to outperform stock
market averages, it’s eliminated from the universe.

It’s a real “cut-and-dried” system where we don’t have to think about what type of stock it is.
No more having to quickly learn about the latest hottest industry. No more trying to time the
market.

The rules-based investment approach tells us what types of stocks are strong and likely to
remain strong for some time, long before the media, analysts or even the company itself
realizes and reports on the strength.

All of that is why relative strength is the right investment approach. Here’s why now is the
perfect time to deploy it.

Chapter
9
A New Momentum Tsunami Is Growing in
Strength
Recently (and right under everyone’s noses), a “momentum tsunami” has formed that is
engulfing the entire stock market. This surging momentum has added another catalyst for
massive gains and has increased the probability of success on top of an already-bullish stock
market.

A tsunami occurs when the ocean suddenly leaves the beach and flows back out toward the
sea. It’s such a rare event that beach-goers usually don’t understand what’s happening or why.
They’re busy surfing or otherwise enjoying the wavy gift given to them by Mother Nature.

Then, the ocean suddenly returns to the beach with an unstoppable force, sweeping away
everything in its path.

Well, that’s what tends to happen with momentum/relative strength investing.

Those lucky enough to have learned the secrets of its regular outperformance and high-risk-
adjusted returns are enjoying their profits … when suddenly the “ocean” rolls away from the
beach: relative strength as an investment starts to underperform. Stunned, some investors
abandon the strategy. That’s their mistake.

Because all of a sudden, a massive wave of outperformance roars back in full-force, crushing
the average returns of most, if not all, of the other investment strategies in existence.

A picture is worth a thousand words, so let’s check out one chart that best illustrates the
opportunity in front of us right now.

Chart 8 compares the performance of a relative strength investment model versus the
performance of the general U.S. stock market (represented by the CRSP U.S. Total Market
Index, which consists of approximately 4,000 stocks). The chart captures nearly 90 years of
history.

Specifically, the chart shows the “alpha,” or the percentage gains above that of the stock
market in a given period.

If the stock market gains 10% for the year and your investment account gains 12%, then you’ve
achieved an alpha of 2%. If the stock market loses 20% and your account loses only 15%, your
alpha in that case is 5%.

Alpha is typically discussed in the context of a fund manager’s performance or the performance
of an investment model, like the relative strength model we are about to discuss.
As a further refinement, this chart doesn’t illustrate single years of alpha.

Chart 8

Instead, the chart shows the “3-year rolling” alpha (outperformance) of the relative strength
model.

For example, in 1947, the chart reaches 100%. That means, in 1947, an investor who invested in
this model would have looked back at the prior three years and said, “In the time period from
1944 to 1947, my account gained 100 percentage points more than the stock market did.”

That’s why the first plot point on the chart occurs in December 1933, even though the chart
starts in December 1930. That first plot point represents alpha from 1930 to 1933 (3 years of
cumulative data).

The model, created by John Lewis at Nasdaq, starts by breaking the U.S. stock market (CRSP)
down into 48 sectors (industry groups). It then puts the 48 groups into a relative strength
matrix, which allows us to rank the sectors 1–48.

We’ve discussed relative strength comparisons of a single stock, like Microsoft or Apple,
relative to the general stock market. We’ve discussed relative strength comparisons of an entire
sector, like Software or Biotech, relative to the general stock market. To understand a sector
relative strength matrix, we must understand that we can also make relative strength
comparisons of one sector to another sector.

The relative strength model that we are studying uses a RS matrix, which does a relative
strength comparison of each sector compared to every one of the other 47 sectors, one by one.

So, if the Drugs sector (a sector made up of stocks like Pfizer, Bristol-Myers Squibb, Eli Lilly, etc.)
were ranked #1 in this RS matrix, then the Drugs sector is showing positive RS compared to
each of the other 47 sectors. If the Auto sector (made up of stocks like Ford Motor Co.,
Chrysler, etc.) is ranked #2, then it’s showing positive RS compared to 46 sectors but negative
RS compared to the Drugs sector.

The relative strength model “owns” the top nine strongest sectors in the 48-sector matrix.
Every month the model “rebalances.” So, at the beginning of every month, any sectors that are
no longer in the top nine are removed from the model and replaced with those that are.

The process of swapping underperforming sectors out of a portfolio and replacing them with
outperformers is called “sector rotation.” I’ll have more to say about that in a moment.

First, for your convenience, here’s the chart again.

Chart 8
Notice how the chart hardly ever moves below the black horizontal line. When the chart is
plotted above the line, investors would have been better off owning the model than owning the
U.S. stock market for the three years leading up to that point.

It’s important to note that a decline in this chart doesn’t mean that the model itself is doing
poorly. Instead, it means the model is STILL outperforming, but by a lesser amount. For
example, in 1947, the model had 3-year cumulative alpha of 100%. A few years later, in 1950,
the model had 3-year cumulative alpha of 25%, which is still 25 percentage points better than
the S&P 500.

Here are two key points to keep in mind.

One, the chart very rarely moves below that horizontal black line. The vast majority of the time,
over the 86 years studied, we only see a dip below that line four times. When it does dip below
the line, it does so by a very small amount in three of the four occasions. In the early 2000s, we
see the 3-year cumulative alpha is negative by approximately 20%.

But here’s the really important point.

Dips below the line are typically followed by massive long-term increases in alpha. The alpha
chart of this model illustrates how, after relative strength or momentum goes through a period
of underperformance, it tends to experience massive outperformance for extended periods of
time.

This is the momentum tsunami that we are faced with right now.

Let’s look more closely at sector rotation as an investment approach. You focus on a small
number of sectors—the strongest sectors of the stock market. By concentrating on just a few
sectors, you can achieve much larger alpha than what you saw in the chart above. (For
example, in the late 1990s, focusing on Technology stocks was the way to get very wealthy,
very quickly.)

The rules of the model we’ve just studied force diversification into nine different sectors. So it
pays to focus on the two to three winning sectors in times when stock market gains are very
concentrated.

The momentum tsunami we experienced from 2002 to 2006 was spread across a number of
financial-based sectors and commodity-based sectors. Therefore, it’s more easily seen in the
model. This is what caused the model to experience 3-year rolling returns of 75%–100%, for
several years.

Chapter
10
Some Concluding Thoughts
This report gives investors the foundation for making what we believe to be the perfect
investment at the perfect time.

Remember, you can get the complete guide to the power of the TRUE MARKET by watching the
full video report here.

You can find the perfect investment in either momentum stocks or, on a more sophisticated
level, relative strength stocks. The perfect time is now, because of the tsunami effect that
momentum and RS stocks and sectors tend to experience, after the investment approach
moves out of favor for a while.

Momentum and RS outperform benchmarks the vast majority of the time.

Sometimes momentum/RS stops outperforming and begins to underperform. It happens every

three to four

years for about three to nine months. What happens next is akin to a tsunami, where
momentum and RS first underperform, but what tends to follow is a ferocious level of
outperformance, crushing the benchmarks.

The time to start using the approach is probably not going to get much better than this. We can
stay diversified in hundreds of stocks at once, while making one massive wager that this
strategy, with a century of history of outperformance, will continue to behave the way it has
historically.

Chris Rowe

Founder, True Market Insiders