Section 13: Relative Strength
How well a security performs relative to its benchmark or another security can be a very useful tool for stock selection, market sentiment readings and portfolio management. The ratio method of measuring Relative Strength is the basis of Intermarket Analysis. One can measure trends in Relative Strength, which may form independent from the price fluctuations, and evaluate the potential for risk-adjusted performance.
Relative Strength measurements are easy to perform, but can be confused fairly easily. Be sure to cover the basic calculation thoroughly.
One of the advantages of performing Relative Strength analysis is the ability to rank securities in order of relative performance.
Comparing the performance of various asset classes, international markets, or individual sectors of the economy opens the door to a whole new field of Technical Analysis called Intermarket Analysis. By comparing the relative strength of broad indices or currencies, one can gauge which sector of the economy should be invested in and which should be avoided.
Sector Rotation is the study of how the major asset classes perform in cycles over time, relative to each other.
Industry Group rotation follows the same rules of relative strength as Sector Rotation.