The chart below is the spread between the relative strength leaders and relative strength laggards (universe of mid and large cap stocks). When the chart is rising, relative strength leaders are performing better than relative strength laggards. As of 10/4/2010:
There were no major changes this week in the RS Spread. The top quartile and the bottom quartile of relative strength stocks continue to generate similar performance–as they have for over a year now. A long-term view of the relative strength spread reveals the strong upward bias of the spread over time.
The RS Spread has seen other transitions from declining spreads to flat spreads to rising spreads (notably following the 2000-2002 bear market).
[...] Relative strength trend following is an excellent strategy that has historically afforded investors large excess returns, along with periodic episodes of underperformance (i.e., good entry points). The inherent volatility keeps most investors away so that returns do not appear to have been arbitraged away over time. Unless human nature changes, the relative strength return factor is likely to continue to work extremely well over time. Have we mentioned this before? Yes-but the reason we are mentioning it again is because relative strength has had a significant period of underperformance which may be in the process of ending. (Check out the short-term and long-term views here.) [...]