Watching This 1 Key Metric Could Help You Beat the Stock Market 

To beat the stock market, buy the dip and sell the rally. While you can’t time the market, this metric can increase your upside potential.

| More on:
crypto, chart, stocks

Image source: Getty Images

The TSX Composite Index surged 11% in the last 12 months and 34% in five years. These returns might not look exciting enough to generate wealth, but the index is the cumulative performance of 237 stocks. Some stocks in this index doubled investors’ money in three months, and some lost 90% of their value in a few months. How can you identify stocks that can outperform the market and help your money grow? No one metric can assure you market-beating returns. 

One key metric to beat the stock market 

However, if you already have a few stocks on your watch list that you are bullish on, this key metric can help you beat the stock market. The Relative Strength Index (RSI) is a technical indicator that tracks the momentum of the stock price. 

Many times, a good stock with strong fundamentals and growth potential is not a buy because the stock price is overvalued. It could be because some hype or short-term trading inflated the stock price. Even a good stock at an inflated price is a poor investment. 

Those who have burnt a hole in their pocket by buying stocks like Shopify and Air Canada at their peak know what it means. These stocks are good investments, but the wrong timing makes their returns negative. While you can’t time the stock market, you can make an educated investment with RSI. 

The RSI measures a stock’s 14-day price momentum and shows the relative speed and magnitude. As the RSI keeps moving with the stock price, it warns you of any abnormal movement in stock prices. An RSI of 30 and below shows the stock is undervalued relative to its short-term momentum. An RSI of 80 and above shows the stock is overvalued.

How to use this key metric in investment decisions

There are many metrics, like price-to-earnings (PE) ratio and return on equity (ROE). However, the way to look at them differs from company to company. A loss-making tech company like Lightspeed Commerce (TSX:LSPD) has a negative ROE of -8.3% and no trailing PE ratio. Yet those who invested in the stock in the October 2023 dip earned 40% returns in the Santa Claus rally that continued till December 2023. 

Lightspeed is an omnichannel platform that helps retailers and restaurants take orders, make payments, and operate multiple stores efficiently. The company has grown its organic revenue steadily and is focusing on profitability. It also has a strong balance sheet that gives it financial flexibility to fund its losses. On the fundamentals front, the company is on the growth path. However, headwinds like a weak economy and business uncertainty have delayed its long-term growth. 

Lightspeed stock currently has an RSI of 39, as the stock fell after it released third-quarter earnings. The last time the stock had an RSI of below 40 was in October 2023. The 39 RSI shows that investors have been selling the stock, putting downward pressure on the stock price. 

The first quarter is seasonally low for retail. So you could see more downside. But once the fundamentally strong stock falls below 30 RSI, chances of growth increase as value investors buy the dip.  

An RSI of 30 or 35 could be an attractive time to buy a strong stock because any optimism in the market or stock could boost the stock price. 

Investor takeaway 

This metric can be used on any stock with strong fundamentals. A stock might trade at a lower RSI for a prolonged period in a market downturn. But it will help you make an educated guess of timing the buying point of a good stock. And when you buy a strong stock at a lower price, your upside potential increases, allowing you to beat the stock market. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

The Motley Fool has positions in and recommends Shopify. The Motley Fool recommends Lightspeed Commerce. The Motley Fool has a disclosure policy. Fool contributor Puja Tayal has no position in any of the stocks mentioned.

More on Tech Stocks

alcohol
Tech Stocks

3 Magnificent Stocks That Have Created Many Millionaires, and Will Continue to Make More

Shopify stock is an example of a millionaire-maker stock that is likely to continue to thrive in the long run.

Read more »

A data center engineer works on a laptop at a server farm.
Tech Stocks

Why Hut 8 Stock is Up 44% in the Last Week

Hut 8 stock (TSX:HUT) has surged in the last week, and even more year to date. But if you think…

Read more »

Coworkers standing near a wall
Tech Stocks

Why Nvidia Stock Fell 10% Last Week

Nvidia stock (NASDAQ:NVDA) fell by 10% last week after its competitor announced an earnings date, but without preliminary results.

Read more »

Businessman holding AI cloud
Tech Stocks

3 Artificial Intelligence (AI) Stocks to Buy With $500 and Hold Forever

Canadian AI stocks like Open Text Corp (TSX:OTEX) are changing the game.

Read more »

Online shopping
Tech Stocks

Should You Buy Shopify While it’s Below $100?

Here's why Shopify (TSX:SHOP) remains a top long-term growth stock investors should consider buying below the key $100 level.

Read more »

A worker uses a double monitor computer screen in an office.
Tech Stocks

Should Investors Buy Lightspeed Stock Ahead of Earnings?

Lightspeed (TSX:LSPD) stock has served a period of drama for investors in the last few months, so what can investors…

Read more »

IMAGE OF A NOTEBOOK WITH TFSA WRITTEN ON IT
Tech Stocks

TFSA Investors: 1 Top Tech Stock to Buy With $500

TFSA investors can consider owning quality tech stocks such as Datadog to benefit from outsized gains in 2024 and beyond.

Read more »

Dots over the earth connecting the world
Tech Stocks

Hot Takeaway: Concentration in 1 Stock Can Be Just Fine

Concentration in one stock can be alright under the right circumstances, and far better than buying a bunch of poor-performing…

Read more »