Relative Strength Part 1

Relative Strength is defined as by investopedia as: A measure of price trend that indicates how a stock is performing relative to other stocks in its industry. It goes on to say: It is calculated dividing the price performance of a stock by the price performance of an appropriate index for the same time period.

There are actually two kinds of Relative Strength as far as my mind understands the concept. In the context of price performance we can have Relative Strength as a measure of price performance relative to some other index.

For example, lets take a look at Agilent Tech Inc. The symbol for Agilent Tech Inc is “A” and it is the first member, alphabetically speaking, of the S&P500 Index. Mathematically, we could write its Relative Strength as follows:

RS = (price change for A over N # of days) / (price change for SPX over N # of days)

This is the definition given by investopedia above and is graphically represented by a performance chart. Here I used SPX as the symbol for the S&P500 index.

Lets take a look at this graphically. The first chart show the 3 month price of Agilent Tech Inc. This stock has gone from approximately 30 to 35 over the last 3 months which is an increase of approximately 5/30 or 16%. Click on charts to enlarge.

Next, lets look at the SPX. It has gone from approximately 1330 to 1240 which is a decrease of 90/1330 or 6.7%.

Finally, look at the comparison chart for Agilent Tech Inc and the SPX. It shows the Relative Strength of Agilent Tech Inc compared to the SPX. This is a price comparison chart over time showing Agilent Tech Inc “Beating the Street”.

The other type of Relative strength is price performance of a stock relative to itself. I will discuss this in greater detail in my next post.