Relative Strength Charts

Bycjrosen May 18, 2007

Although I don’t incorporate stock relative strength charts as much as I should, I am going to begin posting more on this concept as I better understand the implications that can be interpreted from adding this additional tool to the analysis arsenal.

Relative strength charts compare price change relative to another security (or index or asset class).Â The concept of relative strength is important because time is money, and while you may be making a decent return on your trades/investments, you could potentially increase your returns by studying sector strength and stock strength within a given sector.

Here are two examples of stock comparison within an industry group.

Both Apple and Microsoft are heavily followed stocks, but quick, tell me which one would have made you more money in the recent past?

The answer clearly is Apple (AAPL) because of the strong move it has experienced recently relative to Microsoft’s move.Â This implies that newer technology and an alternative to ‘big Microsoft’ could continue to outperform.

Let’s look at another example between two major search engines.Â Between Google and Yahoo, which do you think would have performed better recently?Â I suspect most people would say Google because of its behemoth status as a stock and company.Â Let’s look closer:

Actually, Yahoo would have been the better choice this year, in that its price appreciated stronger than Google’s (recently).Â Of course, these stock prices are dramatically different (Google at $470, Yahoo at $30), yet when compared from a percentage standpoint, you would have been better off in the smaller, less hyped Yahoo (recently).

There is so much to be said on this topic, and I recommend studying more and playing around with as many relationships as you can imagine.

In StockCharts, to find relative strength charts, select Performance (as the chart type) and type symbols in this format:

GOOG:YHOO or DIA:QQQQ

The colon character will set-up the chart and the percentage change will allow you to compare relevant differences.

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