Relative Strength: The Complete Guide to Finding Market Leaders

Every bull market has leaders. Every sector rotation has early movers. Every breakout has stocks that move first.

Relative Strength (RS) helps you find them.

This guide covers everything you need to know about relative strength—what it is, how to calculate it, and how to use it to identify stocks with the best odds of outperforming.

What Is Relative Strength?

Relative strength measures how a stock performs compared to a benchmark—typically the S&P 500 or its sector.

It's not about whether a stock is up or down. It's about whether it's winning or losing the daily competition for capital.

The Core Concept

Think of the market as a race with 500 runners (S&P 500 stocks):

• Some stocks consistently finish in the top 10%
• Some stocks consistently finish in the bottom 10%
• Most bounce around in the middle

Relative strength identifies the consistent winners.

Why It Matters

Relative strength works because of how institutional money moves:

1. Fund managers are benchmarked - They must beat the S&P 500 or get fired
2. They buy leaders - To outperform, they overweight stocks outperforming the index
3. Buying creates more buying - Their purchases push prices higher, attracting more buyers
4. Leaders keep leading - This cycle persists until something fundamental changes

This is why relative strength has been one of the most consistent factors in stock returns for decades.

How Relative Strength Is Calculated

There are several ways to calculate RS. Here are the most common:

Method 1: Simple Performance Ratio

The simplest RS calculation:

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RS = (Stock Return / Benchmark Return) × 100

Example:

• NVDA is up 45% over 6 months
• S&P 500 is up 12% over 6 months
• RS = (45 / 12) × 100 = 375

An RS above 100 means outperforming. Below 100 means underperforming.

Method 2: Percentile Ranking

Rank all stocks by performance, then express as a percentile:

This is similar to the IBD Relative Strength Rating—a stock with RS 95 has outperformed 95% of all stocks over the measurement period.

Method 3: The RS Line

Plot the ratio of stock price to index price over time:

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RS Line = Stock Price / S&P 500 Price

When the RS line rises, the stock is outperforming. When it falls, the stock is underperforming.

The RS line reveals strength that price alone hides:

• Stock down 5%, market down 10% → RS line rising (relative strength)
• Stock up 8%, market up 15% → RS line falling (relative weakness)

The Two Types of Relative Strength

Understanding these two flavors helps you find different opportunities:

1. Relative Strength vs. Market (RS vs. SPY)

Compares a stock to the broad market (S&P 500).

What it tells you:

• Is capital flowing to this stock?
• Is this stock leading or lagging the market?
• During selloffs, does this stock hold up?

Best for: Finding overall market leaders, regardless of sector.

2. Relative Strength vs. Sector (RS vs. Sector ETF)

Compares a stock to its sector peers.

What it tells you:

• Is this the best stock in its sector?
• During sector rotation, which stocks lead?
• Is outperformance company-specific or sector-driven?

Best for: Finding the best stock within a sector you're bullish on.

The Power of Dual Strength

The most powerful signal is when a stock shows both:

• Strong vs. market (RS vs. SPY)
• Strong vs. sector (RS vs. XLK, XLF, etc.)

This means:

1. The sector is attracting capital (sector > market)
2. This stock is attracting the most capital within that sector (stock > sector)

Dual strength = institutional accumulation.

Reading Relative Strength Charts

The RS line is one of the most underused tools in technical analysis.

RS Line Patterns to Watch

1. RS New Highs Before Price

When the RS line makes new highs while price is still below its high, institutions are accumulating. The price breakout often follows.

2. RS Divergence (Warning)

When price makes new highs but RS doesn't, the rally lacks conviction. Leaders are rotating elsewhere.

3. RS Base Building

A flat RS line during a price consolidation is healthy. It means the stock is keeping pace with the market, setting up for the next move.

4. RS Breakdown

When the RS line breaks down from a pattern (even if price hasn't broken down yet), early selling is happening. Institutions see something.

What a Healthy RS Line Looks Like

Screening for Relative Strength

Here's how to use RS in your stock screening:

Screen 1: Market Leaders (Simple)

Find stocks outperforming the S&P 500:

Criteria:

• RS percentile > 80 (top 20%)
• Price > 50-day moving average
• Volume > 500K average

This finds stocks with confirmed relative strength and healthy technicals.

Screen 2: Emerging Leaders

Find stocks whose RS is improving (potential leaders):

Criteria:

• RS percentile increased by 20+ points in last month
• RS percentile now > 60
• Price near 52-week high (within 10%)

These are stocks transitioning from laggards to leaders—often the best entry points.

Screen 3: Sector Leaders

Find the top stocks within each sector:

Criteria:

• RS vs. sector ETF > 100 (outperforming sector)
• Sector ETF RS vs. SPY > 100 (sector is leading)
• Price > 200-day moving average

This finds stocks benefiting from both sector tailwinds and individual strength.

Screen 4: Dual Strength (Best Quality)

The premium filter:

Criteria:

• RS vs. SPY percentile > 85
• RS vs. Sector percentile > 85
• Price at or near 52-week high
• Average volume > 1M

These are the highest-conviction leaders in the market.

Using RS in Practice

Here's how professional traders incorporate relative strength:

For Position Traders

Entry criteria:

• RS percentile > 80
• Price breaking out of base on volume
• RS line confirming with new highs

Exit criteria:

• RS percentile drops below 60
• RS line breaks below its 50-day MA
• Stock starts underperforming while market rallies

For Sector Rotation

When rotating into a sector:

1. Identify sectors with improving RS vs. SPY
2. Within that sector, find stocks with highest RS vs. sector
3. These are the stocks institutions are buying most aggressively

When rotating out:

• Sector RS starts declining
• Your stocks start underperforming the sector
• Money is moving elsewhere

For Risk Management

RS helps you avoid the worst mistakes:

Don't buy:

• Stocks with RS < 40 (bottom 40%)
• Stocks whose RS is declining even in bull markets
• "Cheap" stocks that can't outperform during rallies

Consider selling:

• When RS drops from 90 to 70 (distribution likely)
• When RS diverges negatively from price
• When formerly strong stocks start lagging

Common RS Mistakes to Avoid

Mistake 1: Using RS Alone

RS tells you who's winning, not why. Combine with:

• Fundamentals (is this a quality company?)
• Valuation (how much am I paying?)
• Risk management (what's my stop?)

Mistake 2: Chasing Extreme RS

An RS of 99 might mean:

• A stock that's been on a massive run (late to the party)
• A stock due for a pullback
• A parabolic move near exhaustion

Better: Look for RS 70-90 with improving trend, not RS 99 that's been there for months.

Mistake 3: Ignoring RS Deterioration

A stock dropping from RS 95 to RS 80 is still "strong" by the numbers—but it's weakening. The change matters more than the absolute level.

Watch for:

• RS declining for 3+ weeks
• RS making lower highs
• RS breaking below key moving averages

Mistake 4: Wrong Timeframe

Different holding periods need different RS timeframes:

Using 12-month RS for swing trades means you're seeing stale data.

Relative Strength and Market Conditions

RS works differently in different environments:

In Bull Markets

• High RS stocks tend to lead
• Low RS stocks still go up, just less
• Breadth is wide, many stocks participate
• Strategy: Buy high RS stocks confidently

In Bear Markets

• Low RS stocks get destroyed
• High RS stocks fall less (but still fall)
• RS becomes defensive, not offensive
• Strategy: Avoid low RS, be patient with high RS

In Choppy/Sideways Markets

• RS leadership changes frequently
• Today's leader becomes tomorrow's laggard
• Focus on RS changes, not absolute levels
• Strategy: Tighten timeframes, trade rotations

At Market Bottoms

• RS leadership often shifts dramatically
• Former leaders may not lead the next leg
• Watch for RS improvement in beaten-down sectors
• Strategy: Look for RS inflections, not just high RS

RS in Different Asset Classes

Relative strength applies beyond stocks:

Sector RS

• Compare sector ETFs to SPY
• Leading sectors attract rotation capital
• Lagging sectors often mean-revert eventually

International RS

• Compare country ETFs (EFA, EEM, FXI)
• US vs. International leadership shifts in long cycles
• Currency affects relative returns

Asset Class RS

• Stocks vs. Bonds (SPY vs. TLT)
• Growth vs. Value (IWF vs. IWD)
• Large vs. Small (SPY vs. IWM)

These help with top-down allocation decisions.

Key Takeaways

What relative strength tells you:

• Which stocks are winning the daily competition for capital
• Where institutional money is flowing
• Which stocks have the best odds of continued outperformance

How to use it:

• Screen for stocks with RS > 80 (top 20%)
• Look for RS improvement (laggards becoming leaders)
• Combine RS vs. market AND RS vs. sector for highest quality
• Watch the RS line for early signals

What to avoid:

• Don't buy stocks with persistently weak RS
• Don't ignore RS deterioration in your holdings
• Don't use RS alone—combine with fundamentals and risk management

The professional edge:

Most investors focus on price. Professionals focus on relative price—how stocks perform versus everything else. That difference in perspective is often what separates consistent profits from random outcomes.

Related Reading

• What Stock Strength Really Means
• How Professional Traders Monitor the Market
• S&P 500 Sector Analysis Guide
• Why Leadership Changes Before the Indexes