There is no doubt that at SIA, our investment methodology is firmly rooted in the principles of relative strength investing. This rules based approach allows us to systematically identify and rank the strongest performers from a broad universe of investment alternatives. Through the SIA Relative Strength Reports, we highlight top ranked names both asset classes and individual companies that exhibit sustained outperformance.
When markets are trending and sector leadership is clearly defined, this methodology excels. It enables portfolios to rotate into the strongest sectors and the best performing companies within them, effectively riding waves of momentum that can generate superior returns. In these environments, the power of relative strength shines allocating capital toward leadership and away from laggards.
However, challenges emerge when the market transitions into a non trending or range bound phase. In these periods of flux, sector rotation becomes indecisive prior leaders begin to fade, yet no clear new leadership emerges. This can result in false starts where emerging sectors show temporary strength, only to falter before firmly establishing dominance. During such transitional phases, the clarity offered by relative strength rankings can temporarily diminish, as market leadership becomes more fragmented.
This is often the point where value investors claim an edge. Their strategy focuses on identifying deep-value stock companies trading below intrinsic value, with the expectation that these holdings will eventually re rate higher as fundamentals improve or market sentiment shifts. Unlike momentum based strategies, value investing is often more tolerant of periods of underperformance while waiting for a catalyst to unlock value.
But the key drawback to this value oriented approach is opportunity cost. While investors wait sometimes for extended periods for a value thesis to play out, their capital may be tied up in positions that underperform broader markets.
Understanding opportunity cost is critical for any investor. While patience can pay off in the right value scenario, the cost of inaction or misplaced allocation particularly in prolonged flat or weak markets can be significant.
Hunting Value in Momentum’s Shadow: Leveraging CANSLIM and Relative Strength Together
While SIA is widely recognized for its strength in momentum investing, we believe its value oriented capabilities are often overlooked. Traditional value investing is rooted in fundamental analysis seeking companies that are trading below intrinsic worth based on metrics like earnings, book value, or cash flow. Momentum investing, by contrast, focuses on price behavior and relative strength, which some argue is disconnected from fundamentals. But at SIA, we take a more integrated view. As believers in the Efficient Market Hypothesis, we maintain that all publicly available information both fundamental and technical is already priced into the market at any given time. From this lens, relative strength itself becomes a powerful fundamental signal. Stocks that rise to the top of SIA’s matrix often exhibit strong earnings growth, favorable revisions, and improving institutional sponsorship all traits traditionally prized by growth and quality investors.
Yet what’s equally compelling is what lies at the other end of the spectrum. If the top of the SIA matrix represents momentum leaders, then the bottom becomes a hunting ground for value investors. These are the companies that have fallen out of favor, often due to temporary headwinds, earnings setbacks, or broad sector rotations. As their share prices decline, their valuations become increasingly attractive at least to those with a fundamental lens. But instead of sitting on these undervalued names and waiting indefinitely for sentiment to turn, SIA provides a way to monitor when that shift actually begins. And that’s where we believe value investors can gain an edge by using relative strength not just as a tool for chasing leadership, but as a way to time entries into value positions more effectively.
This concept aligns closely with the CANSLIM model, a growth value hybrid framework developed by William O’Neil. CANSLIM identifies companies with strong earnings growth, new catalysts, and institutional backing, but insists that these fundamentals must also be confirmed by improving price action and broader market direction. In short, it combines fundamental quality with technical validation exactly what SIA enables. With the SIA Relative Strength Advancer, investors can watch for companies that begin rising through the ranks from the bottom. These upward movers often represent value names starting to gain momentum, indicating that the market is beginning to reprice the opportunity. This approach doesn’t abandon value it refines it, reducing the opportunity cost and wait time that typically accompany traditional deep value strategies.
In this way, SIA becomes a powerful tool not just for momentum investors seeking current leaders, but also for value investors hunting for tomorrow’s leaders before they’re widely recognized. By tracking relative strength movements and aligning them with CANSLIM style fundamentals, investors can identify early stage recoveries finding value where others only see underperformance, and entering just as momentum begins to confirm the thesis.
Early Signals of Change: Modeling Sector Rotation with Merck as a Case Study
To bring this framework to life, let’s apply it directly to today’s market conditions using the current SIA reports. Looking first at the SIA Sector Report, which ranks performance across weekly, monthly, and quarterly intervals, we see something notable: the Drugs sector, long out of favor, is making a meaningful move up the Relative Strength Matrix. It climbed 5 spots over the past week a particularly difficult week for markets 10 spots over the past month, and 15 spots over the past quarter. This kind of broad based upward movement suggests that leadership within the sector may be shifting.
We’ve been tracking this trend and have already written about several high quality names like AbbVie, Gilead Sciences, and Johnson & Johnson. However, while these companies are strong operators, they wouldn’t typically be considered value plays by traditional investors. For that, we have to dig deeper to the bottom of the SIA S&P 100 Index Report, where we find names like Bristol Myers Squibb, Pfizer, Amgen, and even Merck. These are companies that have long operated in the shadows of sector leadership, offering discounted valuations but lacking the technical strength to warrant attention.
Consider Merck, which recently made headlines with its $10 billion acquisition of Verona Pharma. Verona, prior to the acquisition, was consistently ranked at the top of the SIA International ADR Index Report and was a standout performer in the SIA Hypothetical ADR Model. The company developed Ohtuvayre (ensifentrine), a first in class inhaled therapy for COPD, marking the first new treatment mechanism for the condition in over two decades. Merck clearly sees this as a multi billion dollar product, and from a CANSLIM perspective, this represents a classic “N” a new product catalyst that could drive future growth. But under the CANSLIM model, a catalyst alone isn't enough it must be confirmed by price action.
This is where SIA’s Point and Figure (P&F) charting comes into play. In particular, Merck’s recent technical setup resembles a Bullish Catapult pattern, one of the most powerful continuation signals in the P&F toolkit. This formation occurs when a stock completes a Bullish Triple Top Breakout, followed by a Double Top Breakout, signaling strong and sustained demand. Historically, this pattern precedes significant price advances and has proven to be a high probability bullish setup.
What makes Merck’s current chart even more compelling is that this Bullish Catapult is forming right along its long term trendline. This provides a clear risk management framework: traders can place a stop near that trendline the “line in the sand” where the setup fails while targeting higher levels of resistance above. When evaluated through the lens of risk/reward, the upside potential/downside risk might tilt decidedly in the advisor's favor.
In summary, SIA’s methodology while rooted in momentum proves equally effective when applied to value investing through the lens of sector rotation, relative strength inflection, and technical confirmation. By using tools like the Relative Strength Advancer, CANSLIM analysis, and P&F charting, investors can uncover deeply undervalued names just as they begin to reassert leadership, shortening the traditional wait time and enhancing return potential in a disciplined, data driven way.
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