Leaders keep leading
By now you have a routine: check the market (lesson 3), then find the sectors money is moving into (lesson 4). Inside those sectors there are still dozens of stocks. Which ones?
Weinstein's answer was simple: buy the ones already beating the market. Not the ones that look cheap after a fall, and not the ones "due for a catch-up", but the ones that are doing better than everything around them right now.
That is what relative strength measures. It is not a forecast. It is a comparison: this stock versus the market, over the same stretch of time.
The relative strength line
You can draw it yourself. Every week, divide the stock's price by the S&P 500's level, and plot the result:
- The line rises when the stock does better than the S&P 500, whether both are rising, or both are falling and the stock is falling less.
- The line falls when the stock does worse than the S&P 500.
That second point is the powerful one. Relative strength is most useful when the market is falling, because that is when real strength is easiest to see. Anyone can rise in a rising market.
A stock that refused to fall
The first half of 2022 was a hard market. The S&P 500 fell about 24% from January to mid-June, and most stocks fell further. Here is Eli Lilly over the same months, and after.
The price chart alone told part of the story. The relative strength line told the rest: through a falling market, buyers kept stepping in. When the market recovered, Lilly did not have to repair any damage. It was already in a Stage 2 uptrend, and it kept leading.
Where relative strength misleads
Here is the honest part. Relative strength tends to persist, but not always.
What separated the two? The stage. Lilly came out of the decline in a Stage 2 uptrend, with its 30-week line rising. Johnson & Johnson came out of it stalled at the top, and its line went flat: the same chop you saw in lesson 2. Strength in a stock that isn't going anywhere is shelter, not leadership.
Putting it together
Relative strength is the last filter before the chart itself. Used with the stage, it narrows a sector to a handful of names worth studying:
- Inside a strong sector, look at stocks in Stage 2.
- Keep the ones whose relative strength line is rising: beating the S&P 500.
- Prefer the ones that held up best in the last market dip.
- Skip Stage 2 stocks with a falling RS line: the trend is there, the leadership isn't.
- Don't confuse shelter with strength: a flat stock in a falling market is not a leader.
On Stage2Stocks you don't need to draw the line for every stock. Our screens show an RS rating that ranks every US stock we cover against the rest of the market after each close. A high number means it has been beating most others.
Try it on Stage2StocksSee today's relative strength leadersUS stocks ranked by relative strength, with their stage beside each one, so you can find leaders that are also in a healthy trend.
Questions people ask
What is relative strength in stocks?
Relative strength compares a stock's performance with the market's. If a stock rises 20% while the S&P 500 rises 10%, it has strong relative strength. If it falls 5% while the S&P 500 falls 15%, its relative strength is also strong: it is doing better than the market, even though it fell.
How do you calculate a relative strength line?
Divide the stock's price by the index level each week and plot the result. When the line rises, the stock is beating the index; when it falls, the stock is trailing it. Most charting apps can draw it as a 'price ratio' or 'compare' line.
Is relative strength the same as RSI?
No. RSI (the Relative Strength Index) compares a stock with its own recent ups and downs, and is used to judge overbought or oversold. Relative strength compares a stock with the market. Stage analysis uses the second.
Do stocks with strong relative strength always keep rising?
No. Strength tends to persist, which is why leaders are worth looking for, but it can fade. A stock that holds up in a falling market may simply be a safe place to wait, and lag once the market recovers. Read relative strength together with the stock's stage.
What does the RS rating on Stage2Stocks mean?
It ranks every US stock we cover against the rest of the market, from 1 to 99, after each close. A high rating means the stock has been doing better than most others. It is a quick way to find leaders; the stage tells you whether the trend behind it is healthy.