Group Relative Strength Analysis by Jaime V. Behar
This equity trader and computer consultant presents an intriguing use of statistical analysis to measure the performance of stock groups for the purposes of asset allocation.
To even the most casual of market observers, it soon becomes clear that stocks tend to move in groups. Whether this is due to the business cycle, industry fundamentals or investor perception, as money flows in and out of groups, so do the fortunes of the stocks within the groups.
Many trading disciplines use group strength as a key ingredient in their methodology. The reason is simple: Stock price movements are in general attributed to the market, the group and finally the stock itself. Clearly, market participants who can identify the trends in group movement will be better equipped to deal with the markets.
In the same way a stock's relative strength expresses the performance of one stock to another, group relative strength (GRS) measures the performance of one group of stocks compared to another. Whether the market is going up or down, some groups will perform better than others. Group relative strength attempts to assign a value to the extent that one group is outperforming or underperforming another.