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Relative Strength Charts: Visually Identifying Leadership

The identification of Leadership groups both on the upside and downside is one of the central objectives of MarketScalpel's research services, and our Market Navigator online platform incorporates several top-down tools for this purpose, such as the Sector Overview Tables and Heatmaps.

The Relative Strength Charts complement these quantitative top-down tools, by providing a qualitative view of individual groups' performance both versus the broad market and the parent sector, that instantly delivers intuitive visual feedback on relative attractiveness, and the extent to which longer term leadership trends are present.

Defining Market Leadership and Momentum

The terms 'Market Leadership' and 'Momentum' are frequently used interchangeably, but we make what we consider to be a critical distinction between the two.

While Momentum is somewhat transitory, with most academic studies suggesting the effect has largely worn off after 6-12 months, we use the term 'Outright Market Leadership' to denote groups that have been in defined uptrends or downtrends versus the broad market for a minimum of 2 years.

This may sound like a high hurdle, but there is a remarkable degree of stability in outright industry group leadership - certainly within individual bull- and bear markets and often for even longer periods - that likely results in the systematic overestimation of what we consider to be Momentum only returns.

Identifying Outright Industry Group Leadership & Extracting Alpha

The Market Navigator Relative Strength charts are generated from derived indices that detrend the relevant group's sector price index by eliminating the impact of price movements in the broad market and parent sector.  This in effect isolates intrinsic performance; and may be viewed as a proxy for attributable alpha.

As with all MarketScalpel sector data this is calculated solely within our proprietary sector database and analytical framework, and is not available from third parties, nor is it in any way related to the Relative Strength Index (RSI) indicator known from technical analysis.

In the analysis of our Relative Strength data we nevertheless use basic trend-following techniques borrowed from technical analysis - such as trendlines and areas of support and resistance - for identifying and monitoring leadership trends.  These have been found to work particularly well and are used extensively in our US Sector Strategy Weekly publication.

However, the process of determining whether trends exist in relative strength is visually intuitive and readily accessible to clients regardless of prior experience in technical analysis, and we are always happy to assist in interpreting situations where ambiguity may exist.

Accessing Relative Strength Charts

The Relative Strength Chart Tool is accessed by clicking the 'Sector Charts' button in the main analysis tool selector area of the Market Navigator controls (see A3 in the controls overview), and selecting 'Relative Strength' from the Display Option drop-down box (B).

 


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