REFS is
a mine of invaluable information for the private investor.
Selecting shares without its help is like trying to
clap with one hand tied behind your back.
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Interpretation
of the relative strength plot
Share
prices, and the value of the companies they reflect, are expected
to grow over the long term. A share price plot (the solid line)
will therefore normally rise. But how can you tell how well
one company compares with others? One way is to look at several
graphs together, but there are physical and practical problems
- especially if they are on different pages of the same book,
as with Company REFS.
The relative
strength plot (the broken line) provides a benchmark. It shows
at a glance how well a share price has performed relative to
the market as a whole, and is ideally rising - to show outperformance.
When the plot is horizontal, the share has performed in line
with the market index, neither better nor worse.
When the
relative strength plot crosses the same horizontal level at
different dates, it indicates a matching of the index between
those dates. Rises and falls between the dates indicate short
term out- or underperformance.
As well as
giving a general visual indication, the relative strength plot
also shows in precise terms, by reference to the vertical scale,
how much better or worse than the market index the share price
performance has been.
Assume, for
example, that the relative strength plot rises by 50% when measured
against the vertical scale (e.g. from 300 to 450). Without needing
to examine either the share price or the index values, this
shows that the share price has, in relative terms, performed
50% better than the market index over the same period.
This is not
to say that the share price has necessarily risen by 50%, or
indeed that it has risen at all. In fact the share price may
well have fallen; but it will only have fallen by half as much
as the index. Conversely, if the share price has risen, it will
have risen in relative terms by 50% more than the index.
In Company
REFS the relative strength plot is rebased, so that it starts
from the same point as the share price plot. This is done for
two reasons: first, to provide a comfortable visual reference
point and, second, to make the most of the height available
without having to compress the vertical scale.
It is important
to appreciate that the two individual plots (i.e. share price
and relative strength) are shown together solely to make efficient
use of space. In most respects (apart from the coincidental
sharing of common scales) each plot should be interpreted separately.
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