⚠️ Personal research and trading notes — not investment advice. The author does not provide licensed advisory services.
In the previous piece, we explained what an RS Rating is, and why we start from stocks that are stronger than the market rather than weaker ones.
But the deeper question is: why does it work? Why should a stock that is already stronger than the market tend to keep being strong — when most finance textbooks tell you "past prices can't predict the future"?
Here's the answer — not just that RS works, but why it works, and when it stops working.
First: this is not new, and not a Thai-only quirk
Momentum — the idea that what is strong tends to stay strong, and what is weak tends to stay weak — is one of the longest-documented and most robust edges in all of finance.
Researchers have tested it back over a century, across dozens of countries, in stocks, bonds, currencies, gold, and commodities — and it keeps showing up. Not because one person got lucky, but because it's baked into the structure of how big money moves.
An RS Rating is simply a ranked way of measuring momentum. So when we use RS, we're not betting on a hunch — we're riding a phenomenon that has survived decades of testing.
Mechanism 1: Institutions accumulate slowly
This is the most important reason.
Large funds, brokerages, foreign institutions — when they decide to buy a stock, they cannot buy it all in a single day. If they bought their whole position at once, the price would spike and they'd be buying expensively against themselves.
So they accumulate gradually, over weeks and months, picking up small pieces at a time so the price doesn't move too hard.
The consequence: as long as they haven't finished buying, the buying pressure persists, and the price stays persistently stronger than the market.
This is the persistence that RS captures. A stock with high RS today tends to keep high RS for weeks, because the "hands" pushing it up are not done buying. Its past strength doesn't predict the future by magic — it simply tells you the accumulation process is still underway.
Mechanism 2: Information diffuses slowly
Textbooks assume "good news gets priced in instantly." In the real world it doesn't.
When a company starts earning more, winning new customers, turning a corner — these truths don't reach everyone at the same moment. Insiders know first, analysts know later, retail traders know last.
So good news gets gradually absorbed into the price, bit by bit, not in one jump. And while the truth slowly spreads, the price strengthens continuously — RS stays elevated through that whole window.
Mechanism 3: Strength attracts more buyers
Once a stock starts running, it creates a self-feeding loop:
- Analysts see the price rising and upgrade their ratings → more buyers come in
- Funds that missed it don't want to be left out, so they chase → pushing the price further
- As the stock grows larger, some indices add it → index funds are forced to buy automatically
Strength becomes a magnet for fresh money. Herding kicks in, and strength keeps manufacturing more strength — as long as the loop keeps turning.
Why "buying what fell hard" fails (mechanically)
Now flip the coin. Why does chasing weak stocks to "catch the bounce" usually hurt?
Because all three mechanisms above also run in reverse.
- Weakness persists too — if institutions are distributing (selling), they also sell slowly, over weeks and months. The selling pressure lingers.
- Bad news also seeps in slowly — what looks "fully washed out" can keep falling, because the ugly truth hasn't finished spreading.
- Weakness repels buyers — analysts downgrade, funds cut losses, indices remove it.
A low-RS stock leaves the opposite footprint of one institutions are accumulating. It's the footprint of distribution. "Bargain hunting" so often becomes "catching a falling knife" because you're standing against a process that isn't done yet.
The honest caveat: momentum reverses hard at extremes
If RS is this good, why not just buy every RS 99 stock and hold forever?
Because momentum has a clear weakness: it reverses hard and fast at extremes, and at market turning points.
When the broad market flips to a downtrend, the previously strongest stocks often fall the hardest — because that's where speculative money is most concentrated. And stocks that have run too steep (parabolic / over-extended) are exposed to fast breakdowns.
This is why we always stress:
1. RS is a filter, not a buy signal by itself — it tells you "which names are interesting," not "when to enter." 2. Market conditions must cooperate — momentum works in uptrends and breaks at market turns, so we check market condition first, always. 3. Always use a stop — because we're right that accumulation continues "most of the time," not "every time." The stop is what makes being wrong cheap. 4. Don't chase over-extended names — high RS because a stock just cleared a clean base beats high RS because it spiked into thin air.
In summary
RS works not because charts are magic, but because it measures a process that takes time — institutions accumulate slowly, information spreads slowly, and strength pulls in fresh money. Together these make strength persist, while weakness persists in the opposite direction.
But a persistent process eventually ends, and it ends hard. That's why we use RS as a starting point, not an ending point — and let the chart, the market condition, and the stop decide timing and risk.
We track the RS of all 732 Thai stocks every day, and send a free weekly summary of the strongest names and the setups forming.
→ Subscribe free at www.moeasymmetry.com