A ranking of a stock's price performance against all other stocks over a defined period — typically 52 weeks — used to identify market leaders before major price advances.
“The stocks that will be the next big winners are almost always the current relative strength leaders.”
— William O'Neil
Deeper Explanation
Relative Strength (RS) is the systematic measure of how a stock is performing relative to the universe of all other stocks. William O'Neil's RS Rating, used in Investor's Business Daily, ranks every stock on a scale of 1 to 99, where 99 means the stock has outperformed 99% of all other stocks over the past 52 weeks. The power of RS as an investment tool comes from a specific empirical finding: the stocks that make the biggest advances in every market cycle almost universally show RS ratings above 80 — often above 90 — before their major moves begin. This means they are already leading the market before they make their biggest gains. Investors who filter their stock searches to high-RS stocks dramatically improve their base rate for finding eventual large winners. RS is calculated with a weighting that emphasises recent performance over older performance — typically the past 12 months with the most recent quarter double-weighted. This ensures the ranking reflects current momentum rather than being distorted by a strong period a year ago that has since reversed. The practical application of RS is as a filter and a priority list. When a stock appears attractive on fundamental grounds, checking its RS provides a quick read on whether the market agrees. A stock with strong fundamentals but low RS (below 70) is either misunderstood — in which case the fundamental story may need more investigation — or facing headwinds that the price is already reflecting. A stock with both strong fundamentals and strong RS has the maximum confirmation that capital is moving in the right direction.
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