Investments, tenth edition

  Relative Strength  

  Relative  strength    measures the extent to which a security has 

outperformed or underperformed either the market as a whole or its particular industry. 

Relative strength is computed by calculating the ratio of the price of the security to a price 

index for the industry. For example, the relative strength of Toyota versus the auto industry 

would be measured by movements in the ratio of the price of Toyota divided by the level 

of an auto industry index. A rising ratio implies Toyota has been outperforming the rest of 

the industry. If relative strength can be assumed to persist over time, then this would be a 

signal to buy Toyota. 

 Similarly, the strength of an industry relative to the whole market can be computed by 

tracking the ratio of the industry price index to the market price index.