Relative Strength Charting Yahoo and Google YHOO GOOG

Dec 4, 2013: 3:17 PM CST

If you had to guess which stock was stronger recently, would you pick Yahoo! (YHOO) or Google (GOOG)?

Remember Google (GOOG) broke to all-time highs above $1,000 per share – it must be stronger, right?

There’s a simple way to answer that question that takes the guesswork out of the equation.

Let’s objectively see which stock is stronger and how to compare similar stocks using relative strength charts.

Google GOOG Yahoo YHOO Relative Strength Daily Chart Correlation Comparison Pair Trade

Yahoo and Google – at least originally – were very similar search engine companies that organized website data and sold advertisements.

While these similarities still remain – and the advertisements sold from search engine traffic/customized ads – the companies have indeed diverged in their products and services offered.

That being said, when we want to compare their stocks, we can either “eye-ball” it or we can simply view a “Relative Strength” performance line like the one at the bottom of the chart.

The middle line on the chart is the 30-day rolling Correlation which is another way to show the relationship between two similar stocks.

To do so, simply divide one stock by the other.  In this case, the Relative Strength Line is created with Yahoo (YHOO) as the numerator and Google (GOOG) as the denominator in an ongoing division (each day’s close is divided and appears as a moving ratio line).

  • When the Relative Strength line rises, it means that the numerator (Yahoo in this example) is getting stronger ‘relative’ to the denominator, Google.
  • A falling Relative Strength line indicates the opposite (strength in Google against Yahoo).

Since early 2012, the relationship between these two stocks was relatively constant as shown by a flat line.

Google outperformed in late 2012 but we see a trendline breakthrough and ever since October 2012, Yahoo (YHOO) has been the clear winner in the Relative Strength battle.

Even though both stocks rose strongly – and fell in late 2013 – together, it was Yahoo’s shares that consistently outperformed Google’s shares (shown by a steadily rising uptrend in the Relative Strength line).

The interesting thing to note lately is the strength in Google when it broke sharply above the $1,000 per share level – this appears as a sharp spike lower in the RS line (red arrow).

Despite this breakout, Yahoo shares continued to show strength as the RS line has been rising since the late October 2013 low.

This is the quickest method to compare two similar stocks, particularly if you’re making a decision between which to add to a portfolio or which to use as a swing/position trading candidate.

Trade the stronger name if all other factors are equal/similar.

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Corey Rosenbloom, CMT
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