How to Make Money in Stocks — Chapter 3: Relative Strength & Signs of Institutional Buying
阅读中文版 (with Audio)Chapter 3: Using relative strength correctly, accumulation ratings, and spotting the next leaders during a market pullback.
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How to Make Money in Stocks — Chapter 3: Relative Strength & Signs of Institutional Buying
"The stocks that hold up best during a market correction, and make new highs first, are the leaders of the next advance." — William O'Neil
Financial Context
Many retail investors prefer the "bargain" that fell from $100 to $20 — and then watch it grind to $5. Institutions concentrate instead in names with relative strength above 85.
The behavioral gap comes from a fundamental misreading of strength: retail sees strength as "it has already moved, the opportunity is gone," while institutions see it as evidence that capital is flowing in.
Wall Street Application
1. Relative Strength Rating (1–99)
- Meaning: The stock's trailing 52-week price performance as a percentile of the entire market.
- Threshold: Buy only above 80. Genuine leaders usually exceed 90 before their advance.
- Common misuse: RS is a screening filter, not a buy signal. High RS plus a correct base plus a healthy market constitutes the full condition.
2. Accumulation/Distribution Rating (A–E)
- A / B: Net institutional buying over the past 13 weeks — up on volume, back on lighter volume.
- D / E: Institutions are distributing.
- How to use it: High RS paired with a D rating usually means retail is driving the advance while institutions exit — a dangerous combination.
3. Identifying Leaders During a Correction
This is the chapter's most practical technique. When the market falls for several weeks, watch which stocks push their RS line to new highs against the tide.
| Market condition | Laggards | Future leaders |
|---|---|---|
| Index down −10% | Down −25% or worse | Down −8% or flat |
| Early rebound | Still near lows | First to new highs |
The logic: a stock that keeps attracting buyers while everyone else is panic-selling has buyers with better information and longer horizons. A market correction is effectively a free strength screen.
Trading Execution Rules
- Treat RS 80 as a hard gate: Never buy below it, however appealing the story.
- Cross-check the accumulation rating: High RS must be paired with an A or B rating.
- Do your work during declines: A falling market is the best time to build a watchlist, not to disengage.
Relevance to a Retirement Portfolio
Relative strength has one defensive use for retirees: identifying chronic laggards in your own portfolio.
Many retirement accounts hold individual stocks owned for years that have persistently trailed the index, retained largely because "selling would lock in the loss." Viewed through relative strength, those positions cost not only return but also capital that could be diversified. Periodically removing chronic laggards is an easier improvement to execute than finding winners.