Comparing a stock's performance to that of a market index points the way to outperformers.

	Tom Ventresca MarketEdge .com
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Relative Strength (50-Day R.S.) is a technician's term that describes the relative performance or strength of a stock to that of a market index. The index used in the calculation can vary, but the S&P 500 is the index. The index used in the calculation can vary, but the S&P 500 is the most popular since it represents a broad gauge of the market's performance. Typically, a stock’s percentage gain or loss over the previous fifty days is compared to the percentage gain or loss of the S&P 500 for the same time period. The result is a number that centers on 1.00. Values greater than 1.00 denote the percentage gain that a stock has outperformed the S&P 500, while values less that 1.00 signify underperformance. A stock with 50-Day R.S. of 1.50 has outperformed the S&P 500 by 50% over the last fifty days. Conversely, a stock whose 50-Day R.S. is .80 has underperformed the S&P 500 by 20% over the same period. Remember that 50-Day R.S. reflects the stock's performance relative to the S&P 500. This means that a stock with a 50-Day R.S. of 1.20 may actually be down in price over the period, but would have outperformed the S&P 500 by 20%.

Relative Strength can be a valuable tool when selecting stocks. When approaching the market from the buy side, stocks with strong 50-Day R.S. (greater than 1.00) should be considered for purchases. On the other hand, when the market is deemed to be unfavorable, stocks with weak 50-Day R.S. (less than 1.00) can be prime short-sale candidates. The logic is simple. Stocks that outperform the market during a bear phase are demonstrating strength for a reason. Whatever the fundamental reason is, it should continue to positively influence the price of the stock once the market becomes favorable. Conversely, stocks that are underperforming the S&P 500 during a bull phase will get crushed when the market heads south.

The chart of IBM located below is a good example of price action associated with positive and negative 50-Day R.S. Note the price decline that occurred from February 2002 through June 2002 when IBM's 50-Day R.S. was less than 1.00. From October 2002 through early December 2002, and again from July 2003 through September 2003, the opposite occurred as IBM rallied while its 50-Day R.S. remained over 1.00.

Relative Strength (50-Day R.S.) shouldn't be confused with Relative Strength Value (RSV) or with Wilder's Relative Strength Index (RSI). RSV is a measurement of a stock's performance versus a universe of stocks. RSV is calculated by totaling the stocks percentage performance for the preceding 12 months or 250 trading days. The calculation is weighted, with the most recent three months assigned a 40% weight, while the previous nine months receive a 60% weight. All of the stocks in the database are then arranged in order of price change and ranked with a value of 99 to 1. A Relative Strength Value of 92 would mean that the stock has outperformed 92% of all other stocks in the database.

RSI, developed by J. Welles Wilder detects overbought and oversold conditions. RSI measures the degree of strength left in a price trend. If price has been declining and RSI drops to 30 or lower, traders should be alerted to a probable reversal of the downtrend, since momentum would appear to be losing its strength. If RSI moves above 70 as price rises, an intermediate top is usually imminent.

Market Edge www.marketedge.com computes the 50-Day R-S, RSV and RSI for over 4400 stocks on a daily basis. They are included in the Second Opinion report and the various screening modules.

Tom Ventresca has been Computrade’s Director of Research since its inception in 1991. Prior to founding Computrade, Tom spent 12 years in the securities industry holding several positions including broker, sales manager, bond trader and market technician.
1947: Born-Pittsburgh, Pa.
1965-1969: Pennsylvania State University, BA degree.
1970-1978: Builder
1978-1990: Securities industry. Firms included First Southeastern, E.G. Francis, First Southeastern, Smith Barney and Oppenheimer.
1990-Present: Computrade Systems, Inc. Co-founder and Director of Research. Computrade is the developer of Market Edge, a comprehensive, computerized research web site, which is accessed by individuals, brokers and institutions throughout the world. As Director of Research, Tom writes Market Edge’s ‘Market Letter’ and ‘On The Edge’ plus the Dr. Market Edge series. Both the Market Letter and On The Edge provide in-depth market analysis based on three market timing models that he developed. Tom also has recently finished a new book, ‘Trade Like A Pro’ which is a systematic, disciplined approach to the stock market. Based on technical analysis, this book addresses five topics that he believes are critical to having success in the market. These subjects include market timing, stock selection, timing entry and exit points, protecting positions and money management.

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