Overview
Relative strength answers one question: is this stock outperforming or underperforming the market? It is the single thread running through nearly every leadership-based method of stock selection — and the reason “buy strength, not bargains” has worked for decades.
First, a critical distinction: relative strength (RS) is not the Relative Strength Index (RSI). RSI is a momentum oscillator comparing a stock to its own recent history. Relative strength here means performance versus the broader market or sector — an entirely different idea.
Origins & history
The idea that strong stocks keep being strong is older than most traders realize:
- 1933Alfred Cowles III & Herbert Jones documented “inertia” — persistence — in stock returns in Some A Posteriori Probabilities in Stock Market Action.4
- 1930s+George Chestnutt ran the American Investors Fund for nearly 30 years using relative strength, publishing market letters that ranked stocks and industry groups by strength — the practitioner's origin.4
- 1967Robert A. Levy formalized it academically in Relative Strength as a Criterion for Investment Selection (Journal of Finance), testing the “relative strength hypothesis” — that past outperformers tend to keep outperforming — and finding meaningful correlation across 26-week periods.1
- 1980sWilliam O'Neil and Investor's Business Daily packaged it for everyone as the 1–99 RS Rating.5
How it works
Relative strength is measured two main ways:
The RS line (a ratio)
Divide the stock's price by a benchmark (often the S&P 500) and plot the ratio over time. When the line rises, the stock is outperforming; when it falls, it's lagging — regardless of whether price itself is up or down. Traders watch for the RS line making new highs, especially ahead of price, as an early sign of leadership.
The RS rating (a 1–99 rank)
Popularized by O'Neil/IBD, this ranks a stock's price performance over roughly the past 12 months against every other stock, on a percentile scale. An RS of 90 means it has outperformed 90% of the market. IBD weights recent quarters more heavily than older ones, so the rating leans toward fresh strength.5
A common variation: Stan Weinstein's “Mansfield” relative strength plots RS as an oscillator around a zero line (RS versus its own moving average), so crossing zero flags a change in leadership — the version used in Stage Analysis.
Market psychology & mechanics
Why would strength persist, when efficient-market theory says it shouldn't? The leading explanations are behavioral and structural:
- ·Under-reaction. Investors are slow to fully price good news, so a leader keeps re-rating higher over weeks and months as the crowd catches up.
- ·Institutional flows. Big funds build positions over time and rotate into winners, adding sustained demand — “following the money.”
- ·Herding & performance-chasing. Strength attracts attention and more buyers, which is self-reinforcing — until it isn't.
O'Neil's plain-language version: “leaders become bigger leaders,” while laggards rarely catch up.5
Honest assessment
Strengths
Relative strength is one of the most robust, widely-replicated edges in all of finance. It works across asset classes, decades, and countries, and underpins the leadership methods of O'Neil, Minervini, and Weinstein.
The academic evidence
The landmark study is Jegadeesh & Titman (1993), Returns to Buying Winners and Selling Losers (Journal of Finance). Buying 3–12-month winners and shorting losers produced profits over the next 3–12 months; the best combination (12-month formation, 3-month hold) earned roughly 1.31% per month for the winner-minus-loser portfolio, and all 16 formation/holding combinations were positive. This put the “momentum” anomaly on the academic map, and it has survived decades of out-of-sample scrutiny.2
Evidence rating: strong and repeatedly replicated — momentum/relative strength is considered a genuine market anomaly, not folklore.
Weaknesses & failure modes
It is not a free lunch. The honest picture professionals know:
- CRASHESMomentum crashes. Momentum suffers rare but brutal drawdowns at sharp market turns. In spring 2009, as the market bottomed and rebounded, the strategy lost more than 70% in about three months — the beaten-down “losers” snapped back hardest (the loser decile rose ~163% Mar–May 2009 while the market rose ~26%), torching anyone short them.3
- RELATIVERelative, not absolute. A high-RS stock can still fall — in a bear market a leader just falls less. RS ranks outperformance, not direction.
- LAGIt looks backward. A 12-month rating is a rear-view mirror; leadership can change before the number does.
- EXTENSIONCrowding & extension. The most obvious leaders can become over-owned and correct sharply once the crowd is all-in.
Professional uses vs. retail misuses
How professionals use it
- As a filter: only hunt for setups among the strongest names/groups.
- Top-down: rank sectors by RS first, then the leaders within them.
- Paired with a setup and a stop — RS says where to look, not when to buy.
Common retail misuses
- Confusing RS with the RSI oscillator and “buying oversold.”
- Buying a high RS rating with no entry or risk plan — chasing an extended leader.
- Assuming high RS means safe; it means outperforming, not protected.
Going deeper
Variations & relatives: the IBD RS rating, the RS line, Mansfield/Weinstein RS, and “dual momentum,” which combines relative strength (vs other assets) with absolute momentum (vs cash/trend) to sidestep some crash risk. Relative strength is also the engine of the academic momentum factor used by quantitative funds.7
Multi-timeframe: RS can be measured over any window. Short windows are noisier and reverse faster; the classic 6–12-month window is the most studied and most stable. Leadership often shows on the higher timeframe first.
A real failure example: the 2009 crash above is the canonical case of why the honest version of this concept matters — the same edge that compounds for years can hand back years of gains in weeks at a violent turn.3
Practice
Observation exercise: add an RS line (price ÷ a broad index) to a few charts. Mark where the RS line makes a new high before price does, and watch what tends to follow. Separately, rank the major sectors by recent relative strength and list each one's two or three leaders.
Quiz 1 — A stock has an RS rating of 30. What does that tell you?
It has underperformed about 70% of the market over the past year — a laggard, not a leader. By O'Neil's standard (RS ≥ 80) it would be skipped.
Quiz 2 — Why can a stock with a high RS rating still lose you money?
Because relative strength is relative. In a falling market a leader falls less, but it can still fall. RS measures outperformance, not absolute direction — you still need a setup and a stop.
Quiz 3 — When is a momentum / relative-strength approach most dangerous?
At sharp market turns after a decline — “panic states” with high volatility and a violent rebound. That's when momentum crashes (e.g., spring 2009), as the worst losers snap back hardest.
This concept in the knowledge graph
Resources
- TRADERWilliam O'Neil, Mark Minervini — the leadership methods built on RS.
- CONCEPTStock Selection & Scanning — where RS does its work.
- GLOSSARYRS rating & RS line.
References (primary where possible)
- Robert A. Levy, “Relative Strength as a Criterion for Investment Selection,” The Journal of Finance, 1967 — Wiley.
- Jegadeesh & Titman, “Returns to Buying Winners and Selling Losers,” The Journal of Finance, 1993 — Wiley.
- Daniel & Moskowitz, “Momentum Crashes,” NBER Working Paper 20439 — nber.org.
- Cowles & Jones (1933) and George Chestnutt — historical overview, “Two Centuries of Momentum,” Newfound Research — thinknewfound.com.
- CAN SLIM & the relative-strength rating (William O'Neil) — Wikipedia.
- Mark Minervini's Trend Template (RS as a criterion) — ChartMill.
- The momentum effect / factor — overview — Wikipedia.