John BajKowski - A Look at Different Measures of Short-Term
Just as a rising tide lifts all boats, a rising market tends to lift all stocks. Well, almost all stocks. Upward price individual stock performance during a strong market may represent only average performance while a minor stock price decline during a major bear market represents strong relative price performance.
Price momentum is normally measured by comparing the stock price change to that of a market index or against a segment of stocks.
Relative strength has grown in popularity as a stock selection tool as a number of research studies and successful investors have highlighted the benefit of seeking out stocks with high relative strength, especially when combined with other fundamental selection variables. Charles Rotblut examines a number of promising studies in a May AAII Journal article.
Price momentum is often used as a signal that the market has recognized the stock price is reacting to either proven performance or an increase in expectations. Investors look for stock price performance better than that of other stocks with the belief that the rising price will attract other investors, who will drive up the price even more. The usefulness of relative strength is premised on the belief that relative strength persists. If a stock has displayed significant positive relative strength against the market, it would be expected to continue to display positive relative strength.