Let's get the terminology right first. A stockpicker will point to a share saying that it is strong relative to its peers, or to the index it is included in. So BP versus Shell, or Lloyds Bank relative to financials, or Tesco relative to the FTSE 100. To measure these accurately we create ratios dividing the share price, plotted over time, using another share, sub-index, or a FTSE index as the denominator.
Technical analysts use something called the relative strength index (RSI) which attempts to measure the inherent strength, or weakness, of an instrument. It is an oscillator whose value always lies between zero and one hundred, the calculation centres on a moving average (usually 14 days) and measures the rate and change in price from one period to the next. Readings under 30 hint at an oversold market while those over 70 mean it is overbought.
Another way to compare rates of change is by starting the instruments you want to compare at a nominal price of 100, then plotting percentage gains or losses. This is especially good for international comparisons and as you can see the FTSE 100 is up by 6.4 per cent since January, trailing the FTSE 250's 10.9 per cent gain, in turn lagging behind Germany's Dax which rallied an impressive 18.3 per cent.
We've done the same thing with sterling against the US dollar as compared with the performance of other major currencies against the greenback. Since March, when US dollar strength started peaking, the pound managed to recover 2.1 per cent of its value, beating the euro's 0.6 per cent gain, but trailing the Canadian dollar's 4.4 per cent push.
Now to Tesco relative to FTSE 100, which as we know is up 6.4 per cent. Tesco had a torrid time last year, dropping to 160p, and a level unheard of since 2003, and kicked off in January at 180. April's high at 229 has not been sustained and we are now trading at 230 which is a 21.6 per cent gain - up 3.3 times as much as the index.
Finally the price of the front month rolling gilt futures contract plotted with its RSI below it. This is based on a notional 10-year gilt where the current cheapest to deliver is the UK Treasury 5 per cent coupon March 2025. Here you can see that the sharp sell-off from January's high at £124 per £100 nominal to a low at £116 on election day. Observed volatility picked up from 4 per cent late March to 9 per cent today as jitters set in. Simultaneously, the RSI dropped from overbought to oversold, hinting that one should currently think of buying gilts.
All well and good, but are these moves likely to prove resilient? A far more difficult question and involves decisions as to whether trends are present and whether they will persist. For the moment we believe that the pound will remain one of this year's stronger currencies, that FTSE 250 is likely to outperform its bigger brother for another three months or so. Tesco tricky.
MORE FROM NICOLE ELLIOTT...
Nicole Elliott is a long standing Member of the Society of Technical Analysts and has just taken over the IC's trading coverage. She is regularly interviewed and quoted by the financial media, is a conference speaker, and author of several books on charting.
