Relative Strength — Following Where Capital Flows

At any point in time, some stocks are rising much faster than the market. Some are lagging badly. And most are somewhere in between. Relative strength is the discipline of identifying which stocks are leading — and understanding that capital consistently flows toward strength, not weakness.

Why This Matters

Relative strength (RS) measures how a stock's price performance compares to all other stocks over a defined period, typically 52 weeks. A stock with an RS rating of 90 has outperformed 90% of all stocks over that period. A stock with an RS rating of 20 has underperformed 80% of all stocks. The concept is deceptively simple and empirically powerful. O'Neil's research showed that the biggest winning stocks of each market cycle had relative strength ratings above 80 before their major price advances began — meaning they were already outperforming the majority of stocks before they made their biggest moves. Buying strength — not weakness — was the systematic path to identifying what the market was actually rewarding. Driehaus approached relative strength from the practitioner's perspective: capital flows toward strength because strength signals where something good is actually happening. The institutions with the best information — analysts closest to management, early reads on earnings revisions, deep industry knowledge — act first. Their buying creates relative strength. By identifying that strength early and following it, the momentum investor is, in effect, following the best-informed capital in the market.

The Core Idea

Relative strength has several practical dimensions. At the stock level, it identifies individual names outperforming the market — potential leaders worth deeper fundamental investigation. At the sector level, it identifies which areas of the economy are attracting capital — where the macro and earnings environments are most favourable. At the market level, it measures whether the broad indices are outperforming cash — the fundamental signal for whether to be invested at all. Sector relative strength is particularly powerful. When a sector begins to outperform the market — healthcare, technology, energy, financials — it usually reflects a genuine change in the earnings environment for companies in that sector: commodity price movements, regulatory changes, demographic tailwinds, innovation cycles. The investor who reads sector relative strength correctly can position in the best stocks within the strongest sectors before that convergence of fundamental and technical strength becomes obvious to the broader market. Relative strength is not just a ranking — it is a filter. O'Neil's recommendation was to consider only stocks with RS ratings above 80, and to focus on those above 90. The reason is arithmetic: the stocks that will double or triple are almost always among the current leaders. It is very rare for a stock to make a major advance while in the bottom half of relative performance. Confining your search to leaders dramatically improves the base rate for finding eventual winners.

Richard Driehaus's Perspective

A Real Example

What to Read Next

The final foundational momentum lesson covers Risk Management — the position sizing, stop-loss discipline, and portfolio construction principles that separate systematic momentum investors from speculators, and that make the strategy sustainable across market cycles.