Stocks & Commodities V. 23:9 (24-29): Can Relative Strength Be Used In Portfolio Management? by J. Lewis, M. Moody, H. Parker, & A. Hyer
The concept of relative strength is part of the foundation
of technical analysis, but can it be used successfully
when it comes to portfolio management?
In its simplest form, relative strength is the measurement of the performance of one item versus another over a period of time. Dozens of formulations
of relative strength have been proposed by technicians, as well as others, over the years. One of the early mentions of relative strength is from one of the masters of technical analysis, Richard Wyckoff:
As your trend charts are made on transparent paper they may be laid over other charts of groups or individual stocks to show which groups and which stocks are stronger or weaker than the general market, as represented by the averages. One of the best indications of the future course of a group or a stock is its comparative strength when the rest of the market is weak, or its comparative weakness in a strong market.
THE EARLY YEARS
Numerous other technicians including George Chestnutt and Sedge Coppock made their own inquiries into relative strength. These technical analysts
were aware of how useful it could be, but their published works on the topic generally lacked statistical detail. (Chestnutt may have preferred the pudding to the proof; he was the manager of one of the
best-performing mutual funds of the 1960s.)