On Relative Strength, shorts and others

“Buy that which is showing strength - sell that which is showing weakness. The public continues to buy when prices have fallen. The professional buys because prices have rallied. This difference may not sound logical, but buying strength works. The rule of survival is not to "buy low, sell high", but to "buy higher and sell higher". Furthermore, when comparing various stocks within a group, buy only the strongest and sell the weakest.”
From Richard Rhodes' Trading Rules

I interpret this rule in regard of the relative strength of the different sectors of the market. Investor sentiment shift over time, and the sectors that 15 days or one month ago were hot could be lagging the market now, you have to be constantly probing the sectors to get ready to adjust your investment or trades.

15 days ago and for the last three months to that date, industrials were leading the markets and the tech sector was behind, then a change of sentiment started to move money out of industrials and into technology. I set out to find some stocks in the tech sector to buy and at the same time to look for some industrial stock to short. Screening with various criteria I found the following companies that picked my interest.

Thermo Fisher Scientific, Inc. (TMO), is a technological company that provides analytical instruments, equipment, reagents and consumables, software, and services for research, manufacture, analysis, discovery, and diagnostics. Thermo Fisher serves pharmaceutical and biotechnology companies, hospitals and clinical diagnostic labs, universities, research institutions, government agencies, and environmental and industrial process control settings primarily in the United States, Germany, and England. It has a collaboration agreement with Proteomics Researcher. The company was founded in 1956 and is based in Waltham, Massachusetts.

Arrow Electronics, Inc. (ARW) The company operates in two segments, Global Components and Global Enterprise Computing Solutions. The Global Components segment offers semiconductor products and related services. It provides passive, electromechanical, and interconnect products comprising capacitors, resistors, potentiometers, power supplies, relays, switches, and connectors, as well as computing, memory, and other products. The Global Enterprise Computing Solutions segment offers enterprise and midrange computing products, services, and solutions to value-added resellers. It also offers access infrastructure, security, and virtualization software solutions, as well as midrange servers, storage, and software solutions.

AboveNet, Inc. (ABVT), together with its subsidiaries, provides high-bandwidth connectivity solutions to corporate enterprise clients and communication carriers primarily in the United States and the United Kingdom. The company provides communications infrastructure and global Internet protocol (IP) network to various companies, such as commercial banks, brokerage houses, insurance companies, investment banks, media companies, social networking companies, Web-centric companies, law firms, and medical and health care institutions.


IDEX Corporation (IEX) engages in the manufacture and sale of an array of pumps, flow meters, other fluidics systems and components, and engineered products worldwide. Its Fluid & Metering Technologies segment designs, produces, and distributes displacement pumps and flow meters, injectors, and other fluid-handling pump modules and systems; and provides flow monitoring and other services for water and wastewater.

I am going to evaluate the different tech companies and the industrial one to see if there is some merit in buying or shorting.

Relative strength
For the past 15 days the tech sector is showing strong relative strength against the market, the industrial sector is lagging the SP500, our three tech stocks have a positive RS vs their group. Of course a favorable RS does not mean your stock is going up, it only means that the stock or group is favorable among the complete stock universe.

Insider Transactions
In the last 12 months insiders sold 294,169 shares of IEX, more or less a 24% of shares in insider’s hands. ABVT insiders sold 961,532 shares in the last 12 months, a worrying 16% of their net holdings approximately. TMO insiders bought 70,898 shares in the last 12 months increasing their holdings in a 7% approximately, and ARW insider’s net transactions in the last year of 241,709 shares, incremented their holdings in an 8%.


Short Interest
ARW and IEX have more or less the same short level with 3% of the float shorted, I don’t want to short a heavily shorted stock but also I don’t want to buy it. I prefer low short interest either to buy or short. ABVT has a 8 days cover ratio, to me it means that short sellers (very sophisticated and well research traders) have a down sentiment on the stock.


Market Cap


Put Call Ratio
When the market is very bullish, the volume of call options will be much larger than the volume of put options because traders are optimistic about future price movements. ARW and ABVT have put/call ratio of 0.2 and 0.3 respectively.
The volume of call options will be smaller than the volume of put options, when the market is very bearish because traders are pessimistic about future price movements. TMO and IEX exhibit a ratio of 1.88 and 1.47.

Last 4 weeks closing prices
All the tech stocks in our study closed this week at the highest level in four weeks; IEX Friday’s close is the lower of the 4 previous Fridays.


There is no divergence in the prices of ARW and IEX with their RS, the analysis call for buying ARW and some interest in shorting IEX.