|
RELATIVE STRENGTH, COMPARATIVE
Overview
Comparative Relative Strength compares two securities to show how the securities are
performing relative to each other. Be careful not to confuse Comparative Relative Strength
with the Relative Strength Index.
Interpretation
Comparative Relative Strength compares a security's price change with that of a "base"
security. When the Comparative Relative Strength indicator is moving up, it shows that the
security is performing better than the base security. When the indicator is moving
sideways, it shows that both securities are performing the same (i.e., rising and falling
by the same percentages). When the indicator is moving down, it shows that the security is
performing worse than the base security (i.e., not rising as fast or falling faster).
Comparative Relative Strength is often used to compare a security's performance with a
market index. It is also useful in developing spreads (i.e., buy the best performer and
short the weaker issue).
Example
In the following charts, the top
chart displays both Microsoft and IBM's prices.
The bottom chart shows the Comparative
Relative Strength of IBM compared to Microsoft.
The Comparative Relative Strength indicator shows that IBM's price outperformed
Microsoft's price during the last three months of 1993. It also shows that IBM's price
then underperformed Microsoft's price during the first three months of 1994. (I drew the
trendlines on the Comparative Relative Strength indicator using the
linear regression technique.)
Calculation
The Comparative Relative Strength indicator is calculated by dividing one security's price
by a second security's price (the "base" security). The result of this division is the
ratio, or relationship, between the two securities.
|
