Beating the Market with Relative Strength?

Give PowerShares, one of the leaders in ETF creation, some credit. They are relatively adept at creating new investment vehicles. On March 1, they served up a new “relative strength” exchange-traded fund onto the American Stock Exchange. The PowerShares DWA Technical Leaders Portfolio (PDP) tracks a 100-stock index that uses a trend-following system in an attempt to beat the market.

Although one week does not a trend make, it is interesting to track the 5-day trend for this offering against a broad market gauge like the S&P 500. While the S&P 500 tracker, the ever-popular spider SPY has lost 0.67% over 5 days, the relative strength tracker PDP has lost 2x that (-1.25%).

Once more, 5 days is by no means a trend. Yet we can say something about the difficulty of succeeding with “relative strength” measures when the market is falling; that is, the idea that a group of stocks moving higher will keep moving higher seems to work best when a broad-based bull market or a clearly defined sector bull market are roaring ahead. When the markets are moving sideways, changing dramatically or heading lower, relative strength is relatively weak.

Disclosure statement:  Some of Pacific Park’s investment clients may hold positions in any of the investments mentioned above.

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