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Issue №76  ·  ~8 min read

The eleventh Saturday of the year. With today's recap the L, Leader vs Laggard, is fully covered. Five of the seven CAN SLIM letters are now yours.

Real talk on delivery first: this week, Monday through Friday, did not go out as evening sends. You are getting all five days here, at once, rather than spread across the week. Same gap that hit a few weeks this summer, now landing on the L.

Seventy-five lessons in. The C, the A, the N, the S and now the L are done. Two remain: the I (institutional sponsorship) and the M (market direction). The five-letter screen is now yours, and it already does most of the filtering.

None of what follows reached you Monday through Friday. Here it is in full.

The first four letters have absolute thresholds: 25% quarterly earnings growth for the C, 25% compounded annually for the A, a stock near its 52-week high for the N, particular accumulation and float characteristics for the S. Each can be measured on one stock, alone, and answered yes or no.

The L cannot. A stock up 30% on the year is a leader if its peers are up 5%, and a laggard if its peers are up 50%. Identical performance, opposite verdict.

So the L is not a check you run once at entry. Rankings move, and a stock that led six months ago can be a laggard today without its own performance deteriorating at all.

It compares against two reference points at once. Industry peers is the more diagnostic: leading direct competitors reflects something specific about the company, and those advantages compound. The broader market sits upstream: a stock leading its industry while lagging the market is the least bad name in a weak group. You want a stock leading both.

One distinction most people miss: leadership is not outperformance. A stock that has beaten its peers for three months is a performer. A leader has been top-decile for six months or more, keeps making new highs as its industry advances, and has fundamentals explaining why. Performers revert. Leaders keep leading.

The Relative Strength rating compresses a stock's trailing price performance into one number from 1 to 99, a percentile rank against every US-listed stock. RS 99 is the top 1%. RS 80 is the top 20%. RS 50 is average.

Note that it measures against everything, not the stock's own industry. The industry comparison from section 1 runs alongside.

The historical record is among the most replicated findings in growth-stock research. RS 99 stocks have tended to beat the market over the following 6 to 12 months by wide margins. RS 90 to 98 outperform meaningfully, RS 80 to 89 only modestly. Below 80, stocks have tended to track the market or lag.

Hence the two thresholds worth memorising. RS 80 is the baseline, the floor below which most screens exclude a stock outright. RS 90 is the elevated standard for high-conviction positions. Starting out, start at 80.

David Ryan won the US Investing Championship three years running, 1985 through 1987, and RS is where his process began. He screened by RS first, restricting himself to 90 and above and preferring 95, then applied the 25/25/25 fundamental filters to what survived. Then he waited for a base to form and bought the breakout when volume confirmed. Brutally selective on purpose: during those championship years his position list was usually a single-digit number of stocks.

The part to hold: RS was his entry filter, not his exit filter. Selling ran on entirely different criteria.

Joe Fahmy has run a public-facing advisory practice for over two decades with a publicly tracked call record. Not a championship winner, but RS is his documented contribution, and four of his refinements are worth having.

The RS line, not just the rating. Plot the stock divided by a broad index. The rating is one point; the line shows the trend in it. RS 92 with a rising line is extending its lead. RS 92 with a falling line is losing it. Same number, different stock.

The RS line making a new high before the price does. Relative strength breaking out ahead of price often leads the price breakout by weeks.

How RS behaves through a correction. When the market drops 5% to 10%, watch which stocks see RS rise. Holding while everything else gives way is extreme leadership, and those names disproportionately lead the next advance.

RS plus a base. The RS establishes leadership, the base establishes that supply and demand have balanced, the breakout is the trigger. Together they beat the sum.

Within a hot sector, put capital in the clear leaders and avoid the laggards, even when they look cheaper with similar fundamentals.

The intuition this contradicts is reasonable: the leader is up 80%, the laggard is up 30%, so the laggard has less downside and more catch-up room. Decades of data say otherwise. Within a cycle the spread widens rather than narrows. That 80 versus 30 becomes 200 versus 40. Both may rise, but the leader's gain is a multiple.

Three mechanisms drive it. Competitive feedback loops: the best product wins the best customers, which funds better research, which makes a better product. Institutional capital concentration: large funds allocate disproportionately to category leaders, which are easier to justify and better covered. Narrative reinforcement: coverage goes to the prominent name, pulling retail buying on top of institutional flow. Laggards get none of the three.

Two genuine exceptions. Leadership transition, where the incumbent stumbles and the challenger takes over, which you can see coming as the leader's RS falls for months while the challenger's rises. And niche specialty, where the classification is too coarse and the apparent laggard genuinely leads a sub-segment. Both real, both rare.

This is the L's version of what the N told you in Day 50: buy strength, not weakness. The mistake to avoid is treating a single letter as a contrarian buy signal. Good fundamentals say the company is sound. The L says whether the market is acting on it. You want both.

Which groups lead is not fixed. Four things drive the rotation: the economic cycle, technology and product cycles, policy shifts, and long-run demographic change, all running at once.

IBD sorts US-listed stocks into roughly 197 sub-industry groups, ranked by six-month price performance. Groups in the top 20% are where selection should concentrate. The top 40% is acceptable. Below that, the L is telling you to look elsewhere.

Two workflows keep you current. With IBD or MarketSurge, scan the group rankings for ten minutes a week. Without them, rank the sector ETFs (XLK, XLE, XLF, XLV, XLI, XLY, XLP, XLU, XLB, XLRE, XLC) by three-month and six-month performance. Coarser, but it tells you where to point the microscope.

The detail that makes this worth doing weekly: group rotation runs one to two months ahead of individual-stock leadership rotation.

Leadership compounds. Laggards do not catch up.

Within a sector, own the leaders. Across sectors, own the leading groups, because a middling name in a leading group frequently beats the best name in a lagging one.

You watched this happen over the past few days.

On Wednesday, energy was the only one of the eleven S&P 500 sectors to finish higher: a leading group announcing itself. Inside it, three stocks tried to break out of chart bases within a day of each other. Devon Energy cleared its 49.72 buy point on Thursday on about 1.66 times its recent average volume, closed at $50.02 at the top of its range, and held it Friday at $50.23 after dipping to $49.23 during the day. Apa cleared its own 45.05 buy point early Thursday, was up 2.8%, and reversed to close lower. Baker Hughes tried to clear 65.44 on Wednesday, reversed, and fell nearly 7% on Thursday.

One leading group, three attempts, one that worked. That ratio is normal, and it is the argument for having rules rather than against them.

Meanwhile copper miners were the worst industry group on Thursday, down more than 5%, with Freeport-McMoRan off nearly 7% on a report that the White House is reconsidering refined-copper tariffs. That is a group rotating out, visible in a single session.

None of it was arranged to illustrate the lesson. It is simply what the L looks like while it happens.

The right leader in an average sector, or an average leader in a great sector?

The great sector, usually. Group tailwinds run for months and lift most of what sits inside them. A top name in a top group is the canonical target. A top name in a decent group is acceptable. A middling name in a top group still tends to work, because the group carries it. A middling name in a middling group has neither dimension going for it. Groups first, then stocks within them.

The weekend habit: build your first five-letter watchlist. Take five to ten stocks and run all five checks. Quarterly earnings growth and acceleration (C). Three-year compound growth and return on equity (A). New 52-week highs with a catalyst (N). The 25-day accumulation count and float (S). RS of 80 or better inside a top-40% group (L). Mark each Pass, Partial or Fail. The Pass names are your watchlist going into the I.

Month 3 Week 3 opens the I, Institutional Sponsorship. Stocks with growing institutional ownership advance more reliably than those with shrinking ownership, even at equivalent fundamentals. The C and A measure the business, the N and L measure price behaviour, the I measures the money itself. That week also brings Linda Bradford Raschke's first feature here.

Pattern of the Week #11 is the third double bottom of the year, and the case is Qualcomm in 1999: the W shape forming inside a market-wide narrative cycle rather than mid-trend.

Beginners in Stock Trading

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