Relative strength in practice: the RS line, RS new highs and ratings

Lesson 1 named relative strength as one of the traits of a market leader. This lesson turns it into a working tool. Two measures do most of the work: the RS line, which tracks one stock against a benchmark every day, and the RS rating, which ranks a stock's performance against all other stocks. They answer different questions, and the best setups usually show both at their strongest. The Learn article on relative strength covers the definitions; here the focus is on reading and using them.

The RS line

The RS line is the stock's closing price divided by the benchmark's closing price on the same day, usually the S&P 500 or SPY. Its level means nothing on its own; its shape is what matters. A rising line says the stock is outperforming, a falling line that it is lagging, and a flat line that it is moving with the market.

Three readings carry most of the information:

• Direction over several months. A leader's RS line makes higher highs and higher lows, much like a price uptrend.
• Behavior during market pullbacks. When the index drops, a leader's RS line often rises or holds flat, because large investors are reluctant to sell their best holdings.
• Behavior inside a base. While a stock moves sideways, its RS line should not fall sharply. A line that breaks down while the price looks calm is an early warning.

The benchmark matters. Measured against SPY, a small cap can look strong only because small caps as a group are rallying. Comparing the stock with its sector ETF as well tells you whether it leads its own group.

RS new highs before the price

The most valuable reading is an RS line that reaches a new 52-week high while the price is still below its own high. This usually happens during a market correction or while the stock is building a base: the index falls, the stock falls less or holds, and the ratio climbs. When the market recovers, such stocks are often the first to break out, because there is little overhead supply and buyers have already shown their preference.

An RS new high on the same day as a price breakout confirms the move. A price breakout without an RS new high, while the index is also making new highs, is weaker: the stock is merely keeping pace. And a price new high with a falling RS line is a warning that the stock is lagging a rising market.

The RS rating: ranking against all stocks

The RS rating answers a different question: how does this stock's performance rank against every other stock? It is a percentile from 1 to 99. A rating of 90 means the stock has outperformed 90% of the stocks ranked. Ratings are built from weighted returns over the past year, and the weighting decides what the rating reacts to.

Clear Tape's formula is 0.4 × the 3-month return + 0.2 × the 6-month return + 0.2 × the 9-month return + 0.2 × the 12-month return. Because the windows overlap, the latest quarter sits inside all four of them. Adding up the weights per quarter gives 1.0 for the latest three months, 0.6 for the quarter before, 0.4 for the one before that and 0.2 for the oldest. The rating therefore reacts mostly to the last three to six months, while a strong year as a whole still helps.

Two practical points follow. First, growth traders commonly look for ratings of 80 or more, and the strongest leaders often sit above 90. Second, the change in the rating matters: a rating climbing from 65 to 88 during a market correction says more about emerging leadership than a rating that has sat at 95 for a year while slowly slipping.

Academic momentum studies usually skip the most recent month when they rank stocks, because returns over a single month tend to partly reverse, an effect documented by Jegadeesh (1990). Ratings used by traders, including Clear Tape's, do not skip it, which makes them faster to react but also more sensitive to a single sharp move. Ratings from different providers use different formulas and cannot be compared one to one.

Relative is not absolute

A rising RS line means only that the stock is doing better than the benchmark. In a falling market, defensive stocks often make RS highs while losing money, because they fall less than the index. An RS signal in a bear market therefore points to stocks to watch for the next advance, not to stocks to buy now.

Leadership can also reverse abruptly. Kent Daniel and Tobias Moskowitz (2016) documented "momentum crashes" at market turning points: from March to May 2009, the stocks with the worst prior-year returns gained more than 150%, while the prior-year winners gained less than 10%. When a bear market ends with a violent rebound, the most beaten-down stocks often lead the first leg, and new leaders take a few weeks to emerge.

Combining relative strength with trend

Relative strength is most reliable when the stock's own trend agrees. A widely used set of trend criteria, published by Mark Minervini in 2013, checks the stacking of moving averages, the distance from the 52-week low and high, and relative strength. Clear Tape's preset Leader Trend Filter implements eight such checks:

1. The close is above the 150-day and 200-day simple moving averages.
2. The 150-day average is above the 200-day.
3. The 200-day average is higher than 21 sessions ago, about a month.
4. The 50-day average is above both the 150-day and the 200-day.
5. The close is above the 50-day average.
6. The close is at least 30% above the lowest low of the last 252 sessions.
7. The close is no more than 25% below the highest high of the last 252 sessions.
8. The stock has beaten SPY over the last 126 sessions and the last 252 sessions.

The published eighth check is an RS rank of 70 or more; the preset uses the two SPY comparisons instead. It flags a stock on the first day all eight pass and exits when any of them fails at a close, or when its trailing stop is hit. It is a filter for leaders, not an entry timer: late in a bull market, many stocks qualify just before they top.

How to apply it

• Screen: keep stocks with an RS rating of 80 or more that pass the trend checks above. Rank the survivors by RS rating and by how close they trade to their 52-week highs.
• Prioritize: during a market pullback, note which stocks make RS new highs while their prices hold within a base. These are the first candidates when the market turns up.
• Entry: relative strength selects the stock; the buy comes at a defined buy point (lesson 5), ideally with the RS line at or near a new high on the breakout day.
• Stop: set the stop from the price chart, not the RS line; many growth traders cap the loss at 7–8% below the entry.
• Invalidation: reconsider the stock when the RS line makes a clear lower low, the RS rating falls below about 70, or the price makes a new high while the RS line does not.

Common mistakes

• Confusing relative strength with the RSI. The RSI compares a stock's own gains and losses; it says nothing about the market.
• Treating a high rating as a buy signal. A rating of 95 tells you what has happened, not where to enter.
• Buying RS leaders in a bear market. Defensive stocks lead falling markets while losing money.
• Using the wrong benchmark. Compare with the sector too, or a group rally may pass for individual strength.
• Ignoring a falling RS line during a price advance. A stock that rises less than a rising market is lagging.

In Clear Tape

The screener shows each stock's RS rating from 1 to 99, calculated with the formula above against every operating US company with a year of history, and Clear Tape's system requires a rating of 80 or more. The morning brief on the Today page lists the stocks with the strongest RS among those that pass every screener rule.

In trading systems, the preset RS New High divides the stock's close by SPY's close on the same date and signals when that RS line closes above its highest value of the previous 252 sessions. The strongest form is when the stock's close is still below its own highest high of the previous 252 sessions, so the RS line leads the price. Its only exit is an ATR trailing stop: the highest high of the last 22 sessions minus 3 × ATR(22), which only moves up. Because it has no exit of its own, it works best alongside an entry system such as the base breakout in lesson 5. The system chart draws the RS line, rebased to the price scale, so you can see it lead.

On the Free plan you can set up to five systems from the presets and keep a 50-stock watchlist. Tools and Pro screen that watchlist with your systems after every close, draw their signals on the chart, run backtests and open the screener and the morning brief.

Summary

The RS line shows whether a stock is beating the market day by day; its most useful signal is a new high that comes before the price's. The RS rating ranks a stock against all others and, with overlapping windows, weights the latest months most. Use both to choose what to watch, check that the stock's own trend agrees, remember that relative strength is not a gain, and leave the timing of the buy to the price chart.

For educational purposes only. Not investment advice.