Relative Strength: Finding Stocks That Outperform

What Is Relative Strength in the Stock Market?

Relative strength describes how a stock's price performance compares to a reference point—typically a benchmark index like the S&P 500, or a peer group within the same sector. A stock with strong relative strength outperforms its reference point over a given period. This concept is foundational to technical analysis because it separates genuine market winners from stocks that rise only because the overall market rises.

The distinction matters significantly. During the 2020-2021 bull market, the S&P 500 gained 68% over two years. But within that period, some stocks like Tesla (TSLA) gained over 700%, while others like Berkshire Hathaway (BRK.B) gained only 42%. All three rose, but their relative strength told completely different stories about which management teams and business models the market favored most.

Absolute Performance vs. Relative Performance

Absolute performance is simple: did the stock go up or down? Relative performance answers a harder question: did it do better or worse than what you could have earned in a passive investment?

Consider this real example:

• Stock A: Rises 15% while the S&P 500 rises 18% → Negative relative strength
• Stock B: Falls 5% while the S&P 500 falls 12% → Positive relative strength

Stock B lost money in absolute terms, but it beat its benchmark, making it technically a relative strength winner. This is why institutional portfolio managers, who are measured against benchmarks, care deeply about relative strength even in down markets.

The Two Essential Relative Strength Tools

The Relative Strength Ratio (RS Ratio)

The RS Ratio is the primary technical tool for identifying relative strength stocks. It's calculated by dividing the stock price by a benchmark index (typically the S&P 500) or by the price of a sector index. The formula is straightforward:

RS Ratio = Stock Price ÷ Benchmark Price

When you plot this ratio over time, you're not looking at the stock's price—you're looking at the mathematical relationship between the stock and its benchmark. A rising RS Ratio means the stock is outperforming; a falling RS Ratio means it's lagging.

Real-World Example: Apple vs. S&P 500 (2023-2024)

Let's examine Apple (AAPL) during a concrete period. On January 1, 2023, AAPL closed at $150.43 with the S&P 500 at 3,824. On December 31, 2023, AAPL closed at $189.95 with the S&P 500 at 4,769.

• AAPL gain: ($189.95 - $150.43) ÷ $150.43 = 26.3%
• S&P 500 gain: (4,769 - 3,824) ÷ 3,824 = 24.7%
• Relative outperformance: 26.3% - 24.7% = 1.6 percentage points

AAPL's RS Ratio rose modestly because it slightly outpaced the index. This doesn't sound dramatic, but in a 25% bull market, any outperformance is notable because you could have just bought VOO (S&P 500 ETF) passively.

Relative Strength Index (RSI) — Don't Confuse Them

The Relative Strength Index (RSI) is a momentum oscillator created by J. Welles Wilder. It measures the magnitude of recent price changes to evaluate overbought or oversold conditions on a scale of 0 to 100. This is not the same as RS Ratio.

RSI formula: RSI = 100 - [100 ÷ (1 + RS)]
Where RS = Average gain over N periods ÷ Average loss over N periods

The critical difference: RSI tells you if a stock is overextended internally (too much up or down momentum); RS Ratio tells you if a stock is beating or losing to its benchmark. Many traders confuse these tools, leading to flawed decisions.

How to Identify Relative Strength Stocks

Step 1: Chart the RS Ratio, Not the Stock Price

In your charting software (TradingView, Bloomberg, etc.), create a ratio chart by dividing the stock symbol by the benchmark. On TradingView, this is done by entering: AAPL/SPY for Apple divided by the S&P 500 ETF.

Now you're looking at a clean line that shows only the relative relationship. When this line trends upward, the stock beats the market. When it trends downward, the stock lags.

Step 2: Look for RS Ratio Uptrends Alongside Price Uptrends

The strongest relative strength stocks have two confirmations:

1. The stock price itself is in an uptrend (higher highs, higher lows)
2. The RS Ratio is in an uptrend simultaneously

This dual confirmation matters because it proves the stock outperforms during its advance. Consider Nvidia (NVDA) during the AI rally from November 2022 to December 2023. The stock rose from $109 to $495 (354% gain) while the S&P 500 rose roughly 45%. Both the NVDA price chart and the NVDA/SPY ratio chart showed powerful uptrends—classic relative strength confirmation.

Conversely, a stock can rise in price while its RS Ratio falls. This happens when the benchmark rises faster. Example: In 2017, many bank stocks rose 15-20% in price, but the S&P 500 rose 22%, so their RS Ratios fell. They looked like gainers but were actually underperformers.

Step 3: Monitor RS Ratio Reversals

When an RS Ratio breaks below a key support level or forms a lower high, relative strength is weakening even if the stock price still rises. This is an early warning signal.

Real example: In early 2022, Tesla (TSLA) continued to rise into January (from $890 to $911 in the first two weeks), but its RS Ratio against SPY broke below the November 2021 support level, signaling that the stock was losing relative strength to the index. Over the next nine months, TSLA fell 67% to $101 while the S&P 500 fell only 16%, confirming the RS warning.

Sector-Level Relative Strength

Understanding Sector Rotation

Relative strength operates at multiple levels. Beyond individual stocks, entire sectors show relative strength to the broader market. Investors who understand sector RS can position ahead of rotations.

In 2022, Technology (XLK) and Communications (XLC) sectors had sharply negative RS Ratios as interest rate hikes punished high-valuation, growth-dependent stocks. Energy (XLE) and Financials (XLF) had strong positive RS Ratios. These RS trends at the sector level preceded individual stock outperformance within each sector.

Top-Down Approach: Sectors First, Stocks Second

Professional investors often use this workflow:

1. Identify which sectors have rising RS Ratios (outperformers)
2. Within those sectors, find individual stocks with the strongest RS Ratios
3. Avoid stocks in sectors with falling RS Ratios, regardless of how attractive they seem fundamentally

This approach filters out the noise. A "great company" in a deteriorating sector often underperforms, while a mediocre company in a strong sector can outperform significantly.

Practical Strategies Using Relative Strength

Strategy 1: Trend Following with RS Confirmation

Buy stocks making new 52-week highs that also have RS Ratios making new highs. Sell when the RS Ratio reverses below key moving averages (like the 200-day MA on the RS chart).

This strategy requires discipline because it often means buying "expensive" stocks after they've already run hard. But the logic is sound: if a stock is both rising and outperforming, the momentum is real.

Strategy 2: Rotation Trading Across Sectors

Track the RS Ratios of all 11 S&P 500 sectors using ETFs (XLK for Tech, XLE for Energy, XLF for Financials, etc.). When a sector's RS Ratio breaks above its 200-day moving average, add exposure to that sector. Exit when the RS Ratio breaks below support.

During the 2022-2023 cycle, this approach would have rotated investors out of Technology in late 2021, into Energy and Financials in 2022, back into Technology in 2023—capturing outperformance in each rotation.

Strategy 3: Relative Strength as a Filter

Use RS Ratio as a qualifier for fundamental analysis. Analyze stocks whose RS Ratios are in the top quartile (rising) over the past 6-12 months. This ensures your fundamental research focuses on securities the market is already favoring, improving your batting average.

Common Mistakes and Pitfalls to Avoid

Mistake 1: Confusing RSI with RS Ratio

Many novice traders see a stock with an RSI above 70 (overbought) and assume it has weak relative strength. Not true. A stock can have an RSI of 80 (very overbought) and a rising RS Ratio (true outperformer). The RSI is measuring momentum intensity; the RS Ratio is measuring market-beating performance. They measure different things.

Mistake 2: Ignoring the Benchmark Context

A stock's RS Ratio is only meaningful relative to your chosen benchmark. AAPL might underperform the S&P 500 but outperform the Nasdaq-100. Define your benchmark first based on your investment mandate. If you're a global investor, compare to MSCI World, not just the S&P 500.

Mistake 3: Chasing Past Winners Without Current RS Confirmation

The most dangerous trap: buying stocks that had great RS Ratios in the past without confirming that the RS Ratio is still strong. Many traders in 2022 bought "beaten down" growth stocks like Zoom (ZM) and Peloton (PTON) after they had crashed. But their RS Ratios were still falling. The correct action was to wait for the RS Ratio to stabilize and reverse upward, which didn't happen for either stock until well into 2023.

Mistake 4: Using Daily RS Charts in Volatile Markets

Daily RS charts are noisy. Use weekly or monthly RS Ratios for cleaner trends and fewer false signals. Daily charts tempt overtrading. A stock might underperform for one week while the broader uptrend remains intact—don't sell based on daily noise.

Mistake 5: Assuming Strong RS Ratio = Good Stock to Own

A rising RS Ratio means a stock outperforms its benchmark. It doesn't mean the stock is good absolutely, only relatively. A stock down 30% while the market is down 40% has positive relative strength but is still a poor absolute holding. Clarify your goal: are you trying to beat a benchmark, or make absolute returns? The answer determines how you use RS analysis.

Relative Strength in Different Market Regimes

Bull Markets

In strong uptrends (like 2023-2024), relative strength stocks tend to be growth and momentum names. Tech, Consumer Discretionary, and Communication Services stocks lead. RS Ratios trending upward are common and widespread.

Bear Markets

In downtrends (like 2022), there are fewer stocks with positive RS, but those that do emerge are treasured. Defensive sectors—Utilities, Consumer Staples, Healthcare—often show relative strength because they fall less than cyclical sectors. A stock falling 10% while the market falls 25% shows strong relative strength despite the absolute loss.

Sideways Markets

When the market is flat, relative strength becomes the primary source of returns. Some stocks rise while others fall, and the RS Ratio cleanly separates winners from losers. Sideways markets are ideal for relative strength strategies.

Advanced: RS Ratio Divergences

What Is a Divergence?

A divergence occurs when the stock price makes a new high but the RS Ratio fails to confirm with a new high. This is a warning signal.

Example: A stock rises from $50 to $65 (new high) over three months. Over the same period, the S&P 500 rises 15%, causing the RS Ratio to fall from its previous level. The stock hit a new absolute high, but the RS Ratio hit a lower high. This bearish divergence suggests the outperformance is fading.

Using Divergences for Exits

Divergences are most useful as exit signals for long positions. When a stock rises to new price highs but the RS Ratio fails to confirm, consider trimming your position. This is especially valuable because it catches deteriorating relative strength before it shows up in the price.

Practical Tools and Resources

Charting Platforms

• TradingView: Use the ratio feature (STOCK/SPY) to chart RS directly. Free and paid tiers available.
• Bloomberg Terminal: Professional-grade RS analysis; used by institutional investors.
• FactSet, Refinitiv: Institutional tools with pre-built RS screens.

ETF-Based Screening

To screen for relative strength at scale, use sector ETF prices as proxies and track their RS Ratios:

• XLK ÷ SPY = Technology relative strength
• XLE ÷ SPY = Energy relative strength
• XLF ÷ SPY = Financial relative strength

This approach identifies which sectors to emphasize without requiring individual stock screening.

Key Takeaways: What You Should Remember

• Relative strength stocks beat their benchmark (like the S&P 500) over a given period—focus on the RS Ratio, not RSI
• Chart the ratio (stock ÷ benchmark) to visualize relative performance; rising ratios = outperformers
• Strongest trades combine rising price and rising RS Ratio—both must confirm the uptrend
• Use RS at the sector level first, then drill down to individual stocks within strong sectors
• Watch for RS Ratio divergences (new price highs without RS Ratio confirmation) as exit signals
• Common trap: confusing past RS strength with current RS strength—always check the present, not the past

Next Steps

Start by charting one familiar stock against the S&P 500 using the ratio method above. Track the RS Ratio for 4-6 weeks and note when it trends up or down, then compare those periods to the stock's actual price performance. You'll quickly develop an intuition for how relative strength works in practice.

For deeper context on technical analysis principles that support RS analysis—like trend identification, support/resistance, and moving averages—refer to our comprehensive Technical Analysis Guide.

Disclaimer: Relative strength analysis is a tool to identify market trends, not a guarantee of future performance. Past outperformance does not ensure future outperformance. Use RS as part of a broader investment process that includes fundamental analysis, risk management, and position sizing.