For example, a paradigm shift in the psychology of the market may result in a change in perspective regarding value as opposed to growth. This can result in a lessening of buying demand for certain technology securities. Investors may become very cautious about buying stocks that have the relatively high PE-ratios so common with technology stocks. The exact nature of such a paradigm shift often does not become clear for a few months after the decline has taken place and it becomes evident where the strong areas are. We know of some traders who monitor an extensive list of ETFs (sectors, industries, investment styles, and indexes) and their strength rank relative to each other in order to keep on top of such paradigm shifts. However, they use a far more complex measurement of strength than the Relative Strength Index (RSI). They look for consistency in strength rather than a simple snapshot measurement based on 14 days. You could do something similar by taking three RSI measurements over three separate time periods and then combine the results. Then, you could rank the totals for all the stocks that you are monitoring.
Growth stocks often achieve a high PE-ratio relative to value stocks. The PE-ratio is the price of a share divided by the earnings per share, or the price investors are paying for each dollar of earnings generated by the company. Growth stocks may even continue to increase an already high PE-ratio over a period of several additional years. Thus, the fact that a growth stock has a PE-ratio of 50 does not mean it cannot go much higher. The PE-ratio goes up when the price of a share goes up. A stock with a PE-ratio of 50 could still double, resulting in a PE-ratio of 100.
