Relative Strength (50-Day R.S.) is a technician's term that describes the relative performance or strength of a stock to that of a market index. The index used in the calculation can vary but the S&P 500 is the most popular since it represents a broad gauge of the market's performance. Typically, a stocks percentage gain or loss over the previous fifty-days is compared to the percentage gain or loss of the S&P 500 for the same time period. The result is a number that centers on 1.00. Values greater than 1.00 denote the percentage gain that a stock has out performed the S&P 500 while values less that 1.00 signify under performance. A stock with 50-Day R.S. of 1.50 has out performed the S&P 500 by 50% over the last fifty-days. Conversely, a stock whose 50-Day R.S. is .80 has under performed the S&P 500 by 20% over the same period. Remember that 50-Day R.S. reflects the stock's performance relative to the S&P 500. This means that a stock with a 50-Day R.S. of 1.20 may actually be down in price over the period but would have out performed the S&P 500 by 20%.
Relative Strength can be a valuable tool when selecting stocks. When approaching the market from the Buy side, stocks with strong 50-Day R.S. (greater than 1.00) should be considered for purchases. On the other hand, when the market is deemed to be unfavorable, stocks with weak 50-Day R.S. (less than 1.00) can be prime short-sale candidates. The logic is simple. Stocks, which out-perform the market during a bear phase, are demonstrating strength for a reason. Whatever the fundamental reason is, it should continue to positively influence the price of the stock once the market becomes favorable. Conversely, stocks that are under-performing the S&P 500 during a bull phase will get crushed when the market heads south.
The chart of IBM located below is a good example of price action associated with positive and negative 50-Day R.S. Note the price decline that occurred from February 2002 through June 2002 when IBM's 50-Day R.S. was less than 1.00. From October 2002 through early December 2002 and again from July 2003 through September 2003 the opposite occurred as IBM rallied while its 50-Day R.S. remained over 1.00.
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