A chart of the Relative Strength
Comparison (RSC) of technology stocks to DOW Jones Industrial stocks is shown
below. It shows how the NASDAQ 100 Index moves as compared to the DOW
Jones Industrial Average Index - INDU.
We use the QQQQ, which is an ETF
at 1/40th of the NASDAQ 100 Index, NDX, and represents 100 of the largest
non-financial companies, many in the technology sector.
The top chart is the daily Qs, and the bottom chart is the relative strength
comparison (RSC) that gauges how the Q's move as compared to the INDU. A
value of 100 on the RSC chart means that the Qs is moving in lockstep (same %
move) with the INDU. We monitor how the "more risky" technology stocks
move as compared to the thirty "large and safe" DOW stocks because it
provides insight into the strength of the market. Usually, when the stock
market is rallying and when the rally is classified as "healthy", technology stocks tend
to lead the rally by moving more strongly upward on the UP days. Said in
another way, when investors start to move more cash into "higher risk" technology stocks this tends to be bullish for the entire market. When back testing, we
noticed that when the RSC dropped to 80 this tended to be a bottom of the
correction, and when the RSC climbed above 85 this was a relatively safe trigger
to go long in the market.
Looking at the chart below, we see that the RSC has climbed above 100 in late
2009 telling us that the technology stocks are leading the long-term UP trend
that is in place. This is one indicator that the long-term UP trend is
still intact, even though the market corrected in mid-2010 and is currently
In summary, when the RSC is trending upward, it tells us
that investors are feeling more comfortable with riskier
trades and this tends to be bullish for the market.
Alternatively, when the RSC is trending downward, it
tells us that investors are reducing their risky
holdings and this tends to be bearish for the market.