Calculating Relative Strength Of Stocks
by Robert L. Hand Jr.
Heavy on consumer stocks? You may want to rethink your strategy and make some adjustments to your
portfolio. Robert Hand addresses the shift of leadership early this year from consumer stocks to
technology stocks, and how relative strength can identify emerging trends.
Bear markets come in two forms, the more visible form when all stocks decline below previous lows
several times for a total drop from the highs of more than l5%. The less visible form of bear market is
often referred to as a sector rotation and is less visible because the changes cannot be easily quoted in
television news. Sector rotation occurs when there is a change in leadership of an industry group. The
stocks of the old leaders, consumers, are falling in value while the stocks of the new leaders, technology,
are rising in value. Sometimes, a function of a bear market is to effect such a change in leadership, but
recently this sector rotation has taken effect even though the Standard & Poor's 500 is reaching new highs
(Figure 1). You'd miss this sector change completely if you didn't use relative strength analysis.
RLATIVE STRENGTH MOVES
Relative strength determines how much an individual stock has moved relative to the market as a whole,
so it detects underperformance. The formula used to measure this (see sidebar, "Calculating relative