Relative strength vs benchmark
Also known as: relative performance
Relative strength measures how a has performed compared to a benchmark, such as a broad index like the , or against a group of peers in the same , rather than looking at its price change in isolation. A can be rising in absolute terms while still lagging the market, or falling while still outperforming a weak market, and relative strength is the tool used to tell those two situations apart.
The most common way to visualize relative strength is a relative strength line, calculated by dividing a 's price by the value of the benchmark at each point in time. When that line is rising, the is outperforming the benchmark, even if both are moving in the same direction. When the line is falling, the is underperforming, regardless of whether its own price is going up or down. This distinction matters because a that merely tracks the market offers little advantage over simply owning an .
Investors use relative strength to identify leadership and laggards within the market, since and that consistently outperform during a given period often continue attracting capital as rotate toward strength. It is also used as a screening tool, some strategies specifically seek out showing strong relative strength as a way of letting the market itself identify the businesses currently favored by other investors, on the theory that sustained outperformance can reflect improving fundamentals before those improvements are fully priced in.