Relative Strength vs Relative Weakness – How to Recognize Strong Assets in the Market?

The financial market is like an arena where different assets are constantly competing with each other. Some take the lead, while others lag behind. It's crucial for investors and traders to recognize which assets are showing relative strength, and which relative weaknessIn other words, we want to know which instruments are performing better than the rest of the market, and which are underperforming. This ability allows us to direct capital toward the highest profit potential and avoid areas at risk of underperformance.

In this article, we will explain what the relative strength and weakness of assets are, how different time horizons affect this assessment, and how to practically use this concept in trading.

What is the relative strength of an asset in the market?

Relative Strength (English) relative strength) is a measure of that, how a given asset performs in relation to another benchmark – usually a broad market index or peer group. This isn't about absolute price growth or decline, but rather relative market strength. For example, if company X's share price rose by +2% on a day when the stock market index fell by -0,4%, we're talking about clear relative strength for that company. Such shares are rising despite an unfavorable environment, which indicates capital inflows and investor demand. Similarly, if a given stock has gained +10% over the year, while the broad market index has grown by +20%, then in relative terms this value is weaker from the market, even though in absolute terms it recorded an increase, which is always positive (unless we are betting on declines, then a little less).

In practice, relative strength is often illustrated by relative indicator or chartIt could simply be a chart comparing the rate of return of various assets for a given period, plus a benchmark such as the aforementioned market rate of return.

Searching for relative strength can also involve isolating a group of assets of interest according to a specific logic and then constructing a chart of that group to find those assets that enjoy the greatest relative strength.

Why do it at all? Investing in such assets can yield better returns than investing in assets that move slower and/or weaker in the market during a given period. Ultimately, there's a reason why certain assets move better than others, and while analyzing the relative strength of various assets on the market doesn't answer the question (fundamental analysis would probably be more effective here), it does allow you to identify these assets and potentially benefit from their movements. Therefore, the relative strength of assets is crucial for investment selection. Since many people's goal is to beat a benchmark (often SP500 index), a natural step is to choose precisely those assets that perform better than the market average.

What is relative asset weakness in the market?

Relative weakness is the opposite of relative strength and refers to a situation in which an asset underperforms the market or its competitors. Such an instrument underperforming compared to the benchmark, which signals lower investor demand. An example of relative weakness would be a stock that loses value more than the stock index during a downturn, or grows significantly slower than the market during a bull market. For example, if the index gains +5% in a quarter, while the share price of company Y stagnates or declines during the same period, we are dealing with relative weakness for that company, which is lagging the market. Relative weakness can also be seen when a given company's shares underperform compared to shares of companies in the same sector.

Similarly, continued relative weakness can lead to continued price apathy. Weaker assets often attract less capital, and the risk of a negative trend becoming self-reinforcing increases (investors sell weaker assets, so they continue to lose ground, which in turn attracts even fewer buyers).

From a market strategy perspective, assets exhibiting relative weakness are typically less attractive to trend-following proponents. Momentum-focused traders prefer to avoid positions in stocks that are outlying the market. Instead of tempting themselves to "catch the bottom" in a weak company, they seek entry opportunities where the trend is already favorable to buyers. It's worth remembering that weak stocks can often remain weak for a long time unless a fundamental change occurs. As long as capital avoids a given sector or asset, it's difficult to expect a change in the unfavorable trend. For example, when the broad market is growing while a particular industry (e.g., energy companies) consistently underperforms, this indicates relative weakness in the sector and warns investors to approach it with caution.

Asset Strength and Time Frame

The assessment of relative strength depends on the adopted time horizonWhat's strong in the short term isn't necessarily a long-term leader. Conversely, a former market leader may temporarily lose momentum. When analyzing an asset's strength and weakness, you should always ask: in what period?

For example, a company may have demonstrated tremendous relative strength over the past few weeks (e.g., it rebounded rapidly from a low during a rally), but when viewed over a year or two, it may still be weaker than the broader market (e.g., it hasn't recovered from the losses from an earlier bear market). Conversely, some "blue chips" that dominated for many years may show sluggishness or corrections in the short term, appearing weak compared to the more dynamic smaller companies. Such contrasts demonstrate the importance of considering different time frames when assessing an asset's strength.

It is therefore important to analyze relative strength in the context of different time frames. Short-term investors, such as day traders or swing traders, can assess relative strength over days or weeks – they are interested in which assets are leading the current market movement. Institutional or long-term investors, on the other hand, are more likely to look at results over several quarters or years. Importantly, the philosophy remains the same regardless of the time scale – we ask "who is the leader and who is the laggard?" – Only the data range changes, as relative strength can adapt to different time frames. It can be measured over several weeks or a year. Top investors often combine these perspectives, looking for assets that are strong both now and over the longer term. If a company has led sector growth for several months and its multi-year growth trend remains intact, we're looking at a truly strong asset.

It's worth mentioning that relative strength analyses typically focus on medium-term time frames, often analyzing price movements over a 3-6-month period to assess which stocks have had the best run. This timeframe is long enough to identify significant trends, yet short enough to capture current "season leaders." However, there's nothing stopping you from applying relative strength tools to daily charts (e.g., comparing stock performance during a single session) or multi-year charts (analyzing entire bull-and-bear cycles). The way in which the information obtained is used depends strictly on the investor's investment strategy.

How to use relative strength in trading?

Understanding and monitoring relative strength translates into real investment decisions. The first application, of course, is selecting appropriate assets Instead of buying random stocks or securities, traders can focus on those that are already proving to be outperforming the market. This approach has been used for years by professional trend-following and momentum investors. They focus their portfolios on the strongest market segments, hoping that capital will continue to flow there.

The financial market is full of information noise and conflicting forecasts, but relative strength provides a clear guide. It shows what actually workswhere the money actually flows, regardless of media information (both traditional and social media). In other words, This tool helps you filter out the media noise and focus on objective data.If a company is beating the index, it may mean that demand for its shares is real and exceeds supply. This usually means there are real reasons for this, even if they aren't yet clearly visible or easily explained. On the other hand, if, despite a large amount of positive news surrounding a given company, it is characterized by relative weakness in the short term, this may signal a correction or even a complete reversal of trend, and in such a case, positive press is irrelevant.

Another important application of relative power analysis is the so-called sector rotation, which involves an investor first identifying sectors or asset classes that are outperforming other sectors, and then selecting individual instruments within those sectors with the highest relative strength. For example, if the broad market index loses several percent over a given period, while the technology sector loses a dozen or so percent, and commodities are slightly rising, it's a signal that it might be worthwhile to allocate some capital to commodities. The next step might be to identify the so-called leaders among commodities, which not only "ride the flow" of the bull market but actually set the tone. These strongest assets—those at the top of the rate-of-return rankings—may represent potential investment opportunities (although this also depends on timing).

And moving on to the issue of timing – relative strength analysis can also be used for timing and position managementBy observing the relative performance of assets, a trader can increase their exposure to positions that confirm their strength (e.g., by buying rising securities that fall less than the market during each correction or recover faster), and reduce or close their exposure where signals of weakness appear (e.g., when a previously strong company suddenly begins to deviate negatively from the index).

It is worth combining the relative strength analysis with other tools, for example technical analysis signals (breakouts of important levels, behavior moving averages, volume) or fundamental data can help distinguish lasting trend changes from short-term noise. Relative strength will show us the direction, but final decision it is worth supporting with a broader context.

Interestingly, relative strength is useful not only for following the momentum of the gains, but also for searching for opportunities contrarianCareful investors watch for moments when a long-underperforming asset suddenly begins to outperform its competitors. Such a sudden increase in relative strength can be the first sign that large capital has recognized an undervalued asset and begun buying it. In other words, a shift from relative weakness to relative strength can signal a trend reversal to the upside. Such a turning point in relative strength often heralds that the worst may be behind the company, and brighter prospects lie ahead. Of course, this is also the case here. confirmation by other methods of analysis is needed, but undoubtedly relative strength is a valuable "radar" that detects new, emerging market leaders.

Summary

Relative strength and relative weakness are fundamental concepts that help assess which assets are market leaders and which are laggards. Analyzing these phenomena involves comparing returns—whether across stocks, sectors, indices, or other instruments—to determine which is performing better than average and which is lagging behind. From an investment perspective, striving to hold the relatively strongest assets in your portfolio (and avoiding the weakest) can increase your chances of achieving above-average results.

Identifying strong assets within the market requires systematic observation and skillful comparisons. In the age of modern tools, investors have various scanners and relative strength charts at their disposal to facilitate this task. Regardless of the technology, however, the key is to understand the concept: always ask. "relative to what" The performance of a given instrument is assessed. This relative assessment provides deeper insight into the market's performance than looking solely at absolute numbers. It allows traders to spot warning signs of weakness early enough and take positions early enough where capital is likely to be well-allocated.

Relative strength analysis can serve as a compass in the world of investing. It allows you to pinpoint which assets deserve to be called "strong" at a given time and which should be avoided. Using relative strength analysis can help you gain an advantage over the market or protect you from costly mistakes. However, remember that the market is dynamic: Today's winner may lose his crown tomorrow. Therefore, continuous monitoring of relative strength is important, and by tracking these changes, the investor remains one step ahead and informed, where the mainstream of money is currently flowing and where the outflow begins.