The Fool FAQ

Relative Strength

The Fool FAQ

What is "relative strength"?

Relative strength rates the performance of every stock listed on the three major exchanges (the New York Stock Exchange, the American Stock Exchange, and the NASDAQ). The rating system gives a numerical grade--just like the ones Mr. Spicer used to scrawl in bright red ink on your algebra quizzes--to the performance of a stock over the past 12 months. (The range is actually 1 to 99.) Thus, relative strength is a momentum indicator. A relative strength of 95, for example, indicates a wonderful stock, one that has outperformed 95 percent of all other America stocks over the past year.

Tomorrow's strong companies and stock market heroes typically flock like geese in the high ranges of relative strength. This contrary notion confounds the Wise, who, when they see a stock with a 52-week high of $22 hitting new lows at $10, purchase the stock because it looks "cheap." The high-flying nature of turbo-charged relative-strength stocks, on the other hand, offends their staid sensibilities.