Group Relative Strength Analysis by Jaime V. Behar
Of all the factors in trading that technicians learn to analyze, surely price and volume are the first two. Here, the basics behind this classic technical tool are explained.
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.
Group relative strength measures can be computed for group indices such as the Standard & Poor's 500 or Dow Jones industry groups. The Investor's Business Daily (IBD) computes and publishes its own group indices and their relative strengths. I prefer the IBD group relative strength for two reasons: First, the breakdown of the groups is narrower and therefore more concentrated; and second, the group indices and their relative strengths are published daily in IBD and therefore are readily available.