What Is Relative Strength?

Relative strength is a strategy used in momentum investing and in identifying value stocks. It focuses on investing in stocks or other investments that have performed well relative to the market as a whole or to a relevant 澳洲幸运5官方开奖结果体彩网:benchmark. For example, a relative strength investor might select technology companies that have outperformed the 澳洲幸运5官方开奖结果体彩网:Nasdaq Composite Index, or stocks that ไare outperforming the S&P 500 index.

Technical analysts use an indicator known as the 澳洲幸运5官方开奖结果体彩网:relative strength index (RSI) to generate overbought or oversold s🎃ignals.

Understanding Relative Strength

While the goal of 澳洲幸运5官方开奖结果体彩网:value investing is to buy low and sell high, the goal of relative strength investing is to buy high and sell even higher. As such, relative strength i▨nvestors assume that the trends currently displayed by the market will continue for long enough to allow them to realize a positive return. Any sudden reversal of that trend will lead to negative results.

To 澳洲幸运5官方开奖结果体彩网:identify investment candidates, relative strength investors begin by observing a benchmark such ꦯas the Nasdaq Composite Index. They will then look to see which companies within that market have꧂ outperformed their peers, either by rising more rapidly than their peers or by falling less rapidly than them.

Because relative strength investing assumes that present trends will continue into the future, it is most effective in stable periods with minimal disruption. By contrast, chaotic periods such as the 澳洲幸运5官方开奖结果体彩网:2007–2008 financial crisis can be dangerous for relative strength investors because they can lead to sharp reversals of investment trends. In those situations, 澳洲幸运5官方开奖结果体彩网:investor psychology can suddenly reverse, with yesterday's investment darlings sudden🐟ly being shunned.

Although momentum investing is often associated with individual stocks, it can also be applied to whole markets or industry sectors using 澳洲幸运5官方开奖结果体彩网:index funds and 澳洲幸运5官方开奖结果体彩网:exchange traded funds (ETFs). Similarly, investors can make relative strength investments in other asset classes, such as in real estate, using 澳洲幸运5官方开奖结果体彩网:real estate investment tru🎃s༒ts (REITs). More exotic instruments, such as commodity futures, options, and other 澳洲幸运5官方开奖结果体彩网:derivative products, can also be used.

Real-World Example of Relative Strength

Harry is a relative strength investor who keeps a close eye on corporate bond prices and the S&P 500. His investment portfolio consists of an S&P 500 index fund and an ETF that tracks the 澳洲幸运5官方开奖结果体彩网:corporate bond market. As a relative strength investor, he periodically increases his 澳洲幸运5官方开奖结果体彩网:allocation toward whichever asset is outperforming at that t♔ime. In doing so, he hopes to benefit from the continuing trend of that🀅 asset's outperformance, effectively buying high and selling higher.

In recent months, he has noticed that investors seem to be increasing their portfolio bond allocations at the expense of stocks. This inflow of money into the bond market has been raising bond prices and lowering yields.

Expecting this trend to continue, Harry responds by decreasing his investment in the S&P🏅 500 and increasing his investment in the corporate bond ETF. He hopes to benefit from any ongoing outperformanc🔯e of bonds relative to stocks.

Relative Strength Index (RSI)

Short-term and technical traders also look at relative strength. In technical analysis, the relative strength index (RSI) is a 澳洲幸运5官方开奖结果体彩网:momentum indicator that measures the magnitude of recent price changes to evaluate 澳洲幸运5官方开奖结果体彩网:overbought or oversold conditions in the price of a stock or other asset. The RSI is displayed as an oscillator (a line graph that moves between two extremes) and 🅰can have a reading from 0 to 100. The indicator was originally developed by J. Welles Wilder J🎃r. and introduced in his seminal 1978 book, "New Concepts in Technical Trading Systems."

Traditional interpretation and usage of the RSI are that values of 70 or above indicate that a security is becoming overbought or overvalued and may be primed for a trend reversal or corrective pullback in price. An RSI reading of 30 or below indicates an oversold or 澳洲幸运5官方开奖结果体彩网:undervalued condition.