Systematic Relative Strength

So far, the low for most of the major U.S. equity indexes came on July 2. In the week and a half since that time the market has rallied sharply with all relative strength quartiles participating to roughly the same degree. The table below shows the performance of a universe of mid and large cap U.S. equities, broken down by relative strength decile and quartile and then compared to the universe return. Those at the top of the ranks are those stocks which have the best intermediate-term relative strength. Relative strength strategies buy securities that have strong intermediate-term relative strength and hold them as long as they remain strong.

Performance (7/2/10 – 7/13/10):

The chart below measures the percentage of high relative strength stocks that are trading above their 50-day moving average (universe of mid and large cap stocks.) As of 7/13/10.

The 10-day moving average of this indicator is 27% and the one-day reading is 59%. The rally over the last week is bringing this indicator out of deeply oversold levels. Dips in the High RS Diffusion Index have often provided good opportunities to add to relative strength strategies.