Relative strength (RS) measures how a stock has performed compared with a benchmark, such as the S&P 500, or with other stocks. A stock with high relative strength has risen more, or fallen less, than the comparison over the same period.
How it works
Two forms are common:
- The RS line: the stock's price divided by the benchmark's price, plotted every day. The level of the line has no meaning on its own; its direction does. A rising line means the stock is outperforming, a falling line that it is lagging.
- The RS rating: a percentile rank of each stock's past performance against all other stocks, typically from 1 to 99. A rating of 90 means the stock has outperformed 90% of the stocks ranked. Investor's Business Daily popularized such a rating; its exact formula is proprietary, but ratings of this kind usually cover the past 12 months and give the latest quarter the most weight.
The idea rests on momentum: stocks that have led over the past several months have, on average, tended to keep leading for a while, a pattern documented in academic research on momentum since the early 1990s. Growth-stock methods built on the work of William O'Neil and Stan Weinstein use relative strength to find market leaders.
Relative strength is not the RSI. The Relative Strength Index compares a stock's own recent gains with its own recent losses and is bounded between 0 and 100. Relative strength compares the stock with something else. A stock can have an RSI of 35 after a pullback and still rank in the top 10% for relative strength.
How to read it
- Direction of the RS line. A line that keeps making higher highs marks persistent outperformance.
- RS leading price. When the RS line reaches a new high before the stock's price does, the stock has been outperforming during the market's weakness, often read as a sign of leadership.
- Ratings in context. A rating rising from 60 to 85 says more about improving leadership than a rating that has sat at 85 for months while falling.
- Groups as well as stocks. The same ratio applied to sector ETFs shows where money is rotating; see sector rotation.
- Combine with trend. Many screens require both high relative strength and a stock above its rising 50- and 200-day moving averages.
Worked example (illustrative numbers)
Over three months, two cases with the benchmark at $500 at the start:
| Rising market | Falling market | |
|---|---|---|
| Stock | $50 → $55 (+10%) | $50 → $48 (−4%) |
| Benchmark | $500 → $510 (+2%) | $500 → $450 (−10%) |
| RS line (stock ÷ benchmark) | 0.1000 → 0.1078 | 0.1000 → 0.1067 |
| Change in the RS line | +7.8% | +6.7% |
In both cases the RS line rose, yet in the second the stock lost money. Relative strength tells you which stocks are holding up best, not that they are going up.
A rating example: a stock returned 20% over 3 months, 30% over 6, 25% over 9 and 40% over 12. Weighting the latest quarter at 40% and each of the other three at 20% gives a score of 0.4 × 20% + 0.2 × (30% + 25% + 40%) = 27%. If that score beats 85% of all ranked stocks, the rating is 85.
Limitations and common mistakes
- Relative is not absolute. In a sell-off, defensive stocks often make RS highs while their prices fall.
- The benchmark matters. A small cap measured against the S&P 500 can look strong simply because small caps as a group are rallying.
- Momentum reverses. Leadership can end abruptly, and momentum strategies have historically suffered sharp losses at market turning points, when beaten-down stocks rebound hardest.
- Late signals. A 12-month rating reacts slowly to a change in leadership.
- Different formulas. Ratings from different providers are not comparable.
In Clear Tape
The screener shows an RS rating from 1 to 99 for each stock and can require a minimum rating. Clear Tape uses its own formula, not IBD's: 0.4 × the 3-month return + 0.2 × each of the 6-, 9- and 12-month returns (63, 126, 189 and 252 sessions), ranked against every operating US company with a year of history on the latest session. In trading systems, the preset RS New High flags a stock whose RS line against SPY closes above its highest value of the previous 252 sessions, with the strongest form when the price is still below its own 52-week high, and draws the RS line on the system chart; the Leader Trend Filter requires a stock to beat SPY over 6 and 12 months. The morning brief lists the strongest-RS stocks that pass every screener rule. The screener, the morning brief, watchlist screening and backtests are available to Tools and Pro members.
For educational purposes only. Not investment advice.