Relative Strength Ranker

Despite similar names, they measure completely different things. Relative Strength (RS) compares a stock's performance to a benchmark (like the S&P/ASX 200) - it is about how the stock performs relative to the market. RSI (Relative Strength Index) is a momentum oscillator that measures a stock's own price momentum by comparing recent gains to recent losses, ranging from 0-100. RS is comparative (stock vs market), while RSI is intrinsic (stock vs itself).

For most investors, weekly RS updates are sufficient. RS is a medium-term indicator, and daily changes are often noise. Weekly reviews allow you to track trends without overreacting to short-term fluctuations. If you're a more active trader, you might check twice weekly. Monthly is the minimum for meaningful analysis. Avoid checking daily as it may lead to excessive trading.

Top 10% (decile) is a good starting point, but not an absolute rule. Studies show the top 20% performs well too. Consider: (1) Smaller universe (S&P/ASX 50) - top 20% gives you 10 stocks, more diversified, (2) Larger universe (ASX 300 or All Ordinaries) - top 10% still gives you 30-50 stocks, (3) Other factors matter too - combine RS with technical setup, fundamentals or sector analysis. Very top ranks can also be overextended.

Yes! This is an important concept. If a stock falls 5% while the ASX 200 falls 15%, the stock has positive relative strength (+10% relative). It outperformed by losing less. In bear markets, the best RS stocks might be those declining least. This is why relative strength matters - it identifies leaders in all market conditions, not just bull markets.

For most purposes the S&P/ASX 200 works well - it is the primary benchmark (about 82% of market cap). Use the All Ordinaries for a broader universe including more small-caps. For sector-specific analysis use the GICS sector indices (XFJ Financials, XMJ Materials, XHJ Health Care etc.). Consistency matters - always compare with the same benchmark. Note total-return vs price-return: Australian large caps pay high franked dividends, so for long-horizon RS consider the accumulation (total-return) index variants.

Several approaches: (1) Exclude stocks with less than 12-month history from ranking - most conservative, (2) Use available history (e.g. 6-month RS for stocks with only 6 months data) but flag them separately, (3) Calculate RS for the available period and compare only within the new-listing cohort. Generally it is safest to require a minimum 6-month history before including a recent ASX float to avoid listing-hype distortions.

RS strategies are momentum-based - they buy winners and avoid losers. At market turning points: (1) Previous winners may be overextended and due for pullback, (2) Previous losers (beaten-down stocks) often lead recoveries as they're undervalued, (3) The 'look-back' in RS means rankings reflect past, not future. V-shaped recoveries are particularly dangerous - 2009 and March 2020 saw momentum crashes where high RS stocks lagged sharply.

Common weighting schemes: (1) IBD-style: 40% recent (3M), 20% each for 6M, 9M, 12M - emphasises recent momentum, (2) Equal weight: 25% each for 1M, 3M, 6M, 12M - balanced approach, (3) Custom for strategy: more weight on recent for short-term trading, more on long-term for position investing. In Australia, given the fast, noisy momentum in small-cap resources, some practitioners weight the 3-6 month window more for that cohort. Test different weights on historical data for your strategy.

Sudden RS spikes can result from: (1) Earnings surprise at a Feb or Aug result - strong numbers gap the price up, (2) Corporate action - buyback, special dividend or a capital return, (3) Sector-wide move - if the sector moves sharply while the stock is a sector leader, (4) Large institutional buying - a block trade or placement lifting the price, (5) S&P/ASX index inclusion. Not all spikes indicate sustainable strength. Evaluate whether the catalyst is one-time or indicates ongoing fundamental improvement.

Calculate both: (1) Market RS = (Stock Return - Market Index Return) over period, (2) Sector RS = (Stock Return - Sector Index Return) over period. Interpretation: A stock with Market RS +15% and Sector RS +5% is outperforming market significantly, but only modestly outperforming its sector peers. The +10% (15% - 5%) is due to sector strength, not stock-specific factors. Ideally, you want positive RS on both dimensions.

Factor crowding occurs when too much capital pursues the same momentum/RS stocks. Effects: (1) High RS stocks become overvalued as crowded buying pushes prices up, (2) When crowded positions unwind, high RS stocks crash together, (3) Returns diminish as arbitrage competition increases. Signs of crowding: unusually low dispersion in top RS stocks, high correlation among momentum holdings, rapid inflows to momentum ETFs/strategies. Mitigation: monitor factor flows, maintain diversification, implement crash protection.

Research on Australian equities suggests: (1) a 6-12 month lookback captures sustainable momentum best, (2) very short (1-month) lookbacks capture noise and reversals, (3) very long (>12 month) lookbacks are slow to adapt. Momentum on the ASX is concentrated in larger, more-liquid names, where a 6-month RS shows solid predictive power for the next 1-3 months. Optimal lookback varies by market cap - small-cap resources may benefit from shorter lookbacks (3-6 month) due to faster momentum cycles. Recommend: 6-month primary, validated with 3-month and 12-month.

During high-volatility regimes: (1) Shorten the RS lookback - recent performance is more relevant when markets move fast, (2) Tighten the selection threshold - require the top 10% instead of top 20%, (3) Add a volatility adjustment - Risk-adjusted RS = RS Score / Volatility, (4) Reduce position sizes through volatility scaling (e.g. keyed to the A-VIX), (5) Consider a trend filter - hold the RS strategy only when the ASX 200 trend is positive. Historically RS-strategy drawdowns cluster in high-volatility periods; these adjustments can reduce this.

Options to mitigate: (1) Use Refinitiv/LSEG or Morningstar data that includes delisted securities (expensive), (2) Manually compile delisted-stock data from ASX archives, (3) Apply a survivorship-bias adjustment (around 1-2% annual return reduction), (4) Focus on the ASX 200/300 universe where delistings are rarer (though small-cap mining delistings are common), (5) Use live forward / paper testing rather than pure backtesting. For practical purposes, acknowledge the bias and be conservative in return expectations. Any backtest on Australian data without delisted stocks overstates returns.

Multi-market RS implementation: (1) Currency effects - decide whether to hedge or include currency in the RS calculation (the AUD is a commodity currency and moves a lot), (2) Trading hours - different market times affect rebalancing execution, (3) Data standardisation - corporate actions, holidays and splits are handled differently, (4) Local benchmarks - use country-specific indices for local RS and global indices for cross-country comparison, (5) Liquidity differences - adjust position-size rules per market, (6) Tax implications - different capital-gains treatments affect net returns, (7) Correlation structure - cross-market momentum may behave differently than single-market. From an Australian base, a natural extension is to the US and other developed markets (and the NZX) before emerging markets.