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Relative Strength Spread

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 12/12/2011:

Given the fact that the spread hasn’t budged in two years (shown above), it is helpful to see the longer-term data (shown below).

A couple of observations:

  1. The relative strength spread has risen, reflecting the superior performance of the relative strength leaders vs. the relative strength laggards over time.
  2. There was a similar (although more mild) period of declining spread following the 2000-2002 bear market that transitioned into a multi-year rise in the relative strength spread.
It will be interesting to see how this plays out going forward, but I wouldn’t be surprised to see this spread shortly resume its upward trend–a potentially very good sign for relative strength strategies going forward.

Past performance is no guarantee of future results.