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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 2/1/2010:

As with all strategies, certain environments are more favorable than others for relative strength.  We’ve seen a little of everything over the last three years.  The RS Spread enjoyed a fairly stable trend higher in 2007.  From July of 2008 to March of 2009 the RS Spread gyrated between very favorable and very unfavorable environments.   From March 2009 to to May 2009 the RS Spread plunged as the laggards rocketed higher.  Since then, the RS Spread has languished.

What comes next?  The historical precedent is for a period of a declining RS Spread to transition into a much more favorable environment for relative strength.  Time will tell how soon this transition takes place.