Real Time Example Of Relative Strength

Let's assume that we want to invest in the UK banking sector right now and have highlighted either Barclays or HBOS.

Barclays - 1 Year Chart

Using the concept of relative strength we'd prefer to put our money into HBOS because it is and has clearly been outperforming Barclays over the past several months. We're zeroing in on two significant point;

1. HBOS is attempting to clear the yearly high whereas Barclays is still about 9% below its 2005 high
2. Look at the relationship on both charts between the old highs in October 2004. When HBOS broke through its high back in December 2004 it managed to do so with some authority and traded to far higher levels. But Barclays didn't, so HBOS has clearly had the better relative strength for some time now.

We would therefore much prefer to be investors in HBOS over Barclays but of course to do this type of analysis correctly it would perhaps be wise to incorporate relative strength analysis on all the main Banks traded on the London Stock Exchange.

Relative Strength Also Has Defensive Properties

The other useful point to note about relative strength is that if you buy the strongest market or stock and the market moves lower it's often the case the strongest stock loses less.

Let's take the assumption that the banking sector falls 10% by Christmas. Probabilities state that HBOS has a good chance of falling say 7%, ie it continues to outperform the market.

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