How Relative Strength Predicted This 1,737% Winner
We looked like any other couple at the restaurant. He was in a nice suit. I was in a dress.
It was our first date. But at the end of the night, we wanted different things…
He wanted a second date. I wanted an introduction to his supplier.
This was one of my first undercover jobs when I worked in law enforcement. My “date” was a respected business owner. But I knew his business was failing. I assumed that’s why he started his side hustle — selling pain pills.
I was certain he was getting them from a local doctor. But I needed proof that would hold up in court. I got it when we met his supplier for drinks on our second (and final) date.
I told the whole story to my mentor, Mike Carr, when I switched careers to finance years later. I explained that my experience exposing illegal drug suppliers as an undercover agent could also help me invest.
After all, if my research skills were good enough to send people to jail, surely picking stocks would be a breeze…
The Wrong and Right Way to Pick a Stock
Mike decided to put this assumption of mine to the test.
He gave me two companies to analyze, and they couldn’t be more different: chipmaker Micron (MU) and burrito-maker Chipotle (CMG).
He showed me where to get all the numbers I needed. He explained that supplier relationships — my narrow field of expertise — were in SEC filings.
We agreed to talk the next week, after I’d done my research. I would tell him then whether each stock was a buy or a sell.
It was a long week for me. I made some charts of each company. I had amazing arguments to support my recommendations.
A week later, we met at a McDonald’s so that my son could tag along. While we waited for our Happy Meals, Mike asked for my results.
(Keep in mind, this was early 2010. These aren’t current recommendations.)
I confidently told him Micron was a buy and Chipotle was a sell.
While I tried to coax my little guy to eat two more bites, Mike looked at his laptop.
His analysis took less than a minute.
He said I was wrong on both…
I wasn’t ready to accept defeat so quickly. “You don’t understand,” I said. “I ran all the numbers.”
His response was that the numbers didn’t matter. The chart told him everything he needed to know.
He was looking at relative strength (RS), using an indicator he’d developed. I’d read his book on it, Smarter Investing in Any Economy, and understood the idea. But I didn’t fully grasp it until he explained it to me in that McDonald’s.
And the next few years proved that his approach was right.
Here’s a chart of Micron from 2010 to today. It fell almost 13% in the 3 years after I gave my analysis.
Here’s a chart of Chipotle. It ran about 252% higher in the 3 years to follow.
The long term also shows Mike was right. From 2010, CMG has risen 1,737%. Micron is up 590%, a third as much.
His indicator proved right for one simple fact: it shows whether large investors are buying or selling. That’s important because large investors are the biggest factor behind price moves.
We don’t know why they’re buying or selling. They may be pushing up prices in the short run because they’re taking a big long-term position.
And they’re not always right. In the long run, they may lose money.
But, as Mike told me, none of that matters. We just use relative strength to find stocks that are moving up right now.
As long as they’re moving up, we buy. When RS turns down, we sell.
It seemed so simple. So, being new to the business, I asked why everyone didn’t use this.
His answer was that people buy stocks for different reasons. Many crunch the numbers, like I did. They believe they’re right and act on that.
We could crunch the numbers and chase after the same stocks they do… Or we could watch the price action and see whether most large investors are buying or selling.
I was convinced. From that day on, I based my work on relative strength. My indicators all evolved from that simple discussion.
As for Mike, he still uses the original strategy he showed me.
And right now, you have a unique chance to access it…
For just $4 a month, Mike will send you the top-performing tickers to hold in your portfolio — the names with the highest relative strength.
He does all the research for you. You don’t have to crunch a single number…
You just dedicate 10 minutes a month to maintaining your portfolio, and spend the rest of your time as you please.
If you want to learn more, click here for all the details on Mike’s low-risk, market-beating strategy.
Regards,Amber Hestla Senior Analyst, True Options Masters