Technical valuation of shares based on “Return and Strength”

TransStock > Analysis > Technical valuation of shares based on “Return and Strength”

In previous years, you may have regularly read a contribution in which it was proven to select strong shares from strong sectors and strong markets. This increases your rate of success.

 

Yield (%)

Shares that increase drastically are not automatically strong shares. On the contrary: a share that moves sideways over a longer period of time and suddenly undergoes a rapid price appreciation, which makes the share shoot upward in the table with the overview or returns, is not a strong share at that point.

It is a strong riser, but the price can just as well fall quickly or at least decrease by half. Generally, such a riser appears after important news.

 

Strength (RS)

Strong shares are considered over weeks, months, and years. How do they perform against the rest of their sector or the market? What do those shares do when the market falls? Do they retain their course? What do these shares do when the market rises? Do they increase faster?

Shares that perform relatively strongly have a reason for doing so. Even fundamentally, the picture generally looks good with these types of shares. Few investors are willing to get rid of the share (cheaply).

 

Formula

Using the table above, you can see that value X is 9.09% stronger than value Y. 
RS = (120/110-1)

 

Contribution January 2018

We are almost halfway the year 2018, which makes me curious to test the Return and Strength of the items in “List of Shares Worth Buying”, the article from early January. 

In the January 2018 edition of ‘Beste Belegger’, you were introduced to an interesting contribution named ‘De VFB Eindejaarsvraagjes’ (or VFB end-of-year questions). A number of analysts each introduces three shares worth buying. A brave task with the final score in December 2018; brave in particular considering that the economic and political landscape can change tremendously within 12 months. Thought has been put into the shares worth buying, and exactly for that reason, lists like these have great value. Perhaps more on the fundamental than the technical side. Moreover, it concerns a plethora of different applied valuation models and growth prognoses, which makes the report even more intriguing. These examinations will save you a lot of time, and you will be able to limit yourself to a relatively small group of shares worth buying. The wheat and the chaff have been separated. 

In this contribution I will consider this collective method, because it saves you a lot of time. Furthermore, this method is a simple and logical approach: the Yield-Strength Analysis.

 

I will take this table form January, and add the yields gained since January. Column two and three contained the relative strength (RS) against the EuroStoxx 600. The RS-values date from January on the short and long term. 

The shares with an RS under 90 have fallen with an average of -6.03%, whereas shares with an RS over 110 rose with +31% on average. 

The average yield of all 40 shares is +4.69%.

On the basis of the RS-analysis above, it is obvious that strong shares have a higher yield. Your choice of 40 values is simple, because few shares performed strongly in January on both the short and long term.

Nevertheless, many investors are of the opinion that you should buy shares that are ‘low’. In January, Accell, Anheuser-Busch Inbev, Bekaert, Carrefour.. Weak with an RS under 90. For Anheuser-Bush Inbev, this signal was found both on the short and long term. Since January, the price is an additional 14% lower.

Of course, there will be a day on which even those shares perform better, but time is money. When the performance of those shares improves, their relative strength increases automatically, and that gives you the ideal moment to step into the market for a promising share.

As I wrote in January: “It is a simple and logical method”…

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