Glossary
Relative strength
How a stock has performed compared with a benchmark or its peers, often charted as a ratio line; not the same thing as the RSI.
Relative strength measures how one security has performed compared with something else, usually a market index such as the S&P 500, a sector or a group of peers. A stock that rose 10% while the market rose 15% went up in absolute terms but showed relative weakness. Investors use relative strength to find leaders and laggards, and it underlies momentum strategies that favor recent outperformers.
How it works
The simplest form is a ratio line: divide the stock's price by the benchmark's level each day and chart the result. When the line rises, the stock is outperforming; when it falls, it is lagging, regardless of whether the stock itself is going up or down.
Some services turn relative strength into a percentile rank, scoring each stock from 1 to 99 by its trailing return against all others.
How it is used
- Spotting leaders. A stock whose RS line makes a new high before its price does is showing strength that some traders treat as an early clue.
- Sector rotation. Comparing sector ETFs with the broad market shows where money is flowing. See Sector rotation.
- Momentum investing. Academic research has documented that stocks with strong returns over the prior 3 to 12 months have, on average, kept outperforming for some months afterward, though the effect is prone to sharp reversals.
Not the same as RSI
The Relative Strength Index has a confusingly similar name but measures something different: it compares a stock's own recent gains with its own recent losses and does not involve any benchmark. A stock can have a high RSI and weak relative strength at the same time, for example when it rebounds sharply but less than the market.