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 500) - it's 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 100) - top 20% gives you ~20 stocks, more diversified, (2) Larger universe (Russell 3000) - top 10% still gives you ~300 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 S&P 500 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 500 or Russell 3000 work well. The S&P 500 is appropriate when comparing large-cap stocks. The Russell 3000 is better for a broader universe including mid and small-caps, as it's a more representative benchmark. For sector-specific analysis, use Select Sector ETFs (XLK, XLF, XLV, etc.). Consistency matters - always compare with the same benchmark.

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's safest to require minimum 6-month history before including in rankings to avoid IPO 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 - emphasizes 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. Some US practitioners weight the 3-6 month window more given the trend persistence of large-cap leadership. Test different weights on historical data for your strategy.

Sudden RS spikes can result from: (1) Earnings surprise - strong results cause price gap up, (2) Corporate action announcement - buyback, special dividend, spin-off, (3) Sector-wide move - if the sector moves sharply while the stock is the sector leader, (4) Large institutional buying - a block trade lifting price, (5) S&P 500 or index inclusion announcement. 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 - S&P 500 Return) over period, (2) Sector RS = (Stock Return - Sector ETF Return) over period. Interpretation: A stock with Market RS +15% and Sector RS +5% is outperforming the 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 (e.g., MTUM). Mitigation: monitor factor flows, maintain diversification, implement crash protection.

Research on US markets suggests: (1) 6-12 month lookback captures sustainable momentum best, (2) Very short (1-month) lookback captures noise and reversals, (3) Very long (>12 month) lookback is slow to adapt. Specific findings: 6-month RS shows strong predictive power for the next 1-3 month returns in US stocks, and the academic momentum factor typically skips the most recent month to avoid short-term reversal. Optimal lookback varies by market cap - smaller caps (Russell 2000) 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 RS lookback - recent performance more relevant when markets move fast, (2) Tighten selection threshold - require top 10% instead of top 20%, (3) Add volatility adjustment - Risk-adjusted RS = RS Score / Volatility, (4) Reduce position sizes through volatility scaling, (5) Consider adding a trend filter - hold RS strategy only when market trend is positive. Historical analysis shows RS strategy drawdowns cluster in high-volatility periods; adjustments can reduce this.

Options to mitigate: (1) Use survivorship-free databases such as CRSP, Norgate Data, or Sharadar that include delisted securities, (2) Manually compile delisted stock data from exchange archives, (3) Apply a survivorship bias adjustment factor (~1-2% annual return reduction), (4) Focus on a large-cap universe (S&P 500) where delistings are rarer, (5) Use live forward testing rather than pure backtesting. For practical purposes, acknowledge the bias in your analysis and be conservative in return expectations. Any backtest on US data without delisted stocks overstates returns.

Multi-market RS implementation: (1) Currency effects - decide whether to hedge or include currency in RS calculation, (2) Trading hours - different market times affect rebalancing execution, (3) Data standardization - corporate actions, holidays, splits handled differently, (4) Local benchmarks - use country-specific indices for local RS, 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 have different dynamics than single-market. Start by extending from the US to other developed markets (Europe, Japan) before emerging markets.