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Relative Performance

From year to year and decade to decade, markets and investment styles come into favor and fall out of favor. Like fashion, things become trending, and some fall out of fashion. It is the same as with stocks, markets, and investment styles.


On a year-to-date basis, Momentum (MTUM -7.00%) versus Quality (QUAL +1.14%), Growth (IVW -3.74%) versus Value (IVE +8.58%), Large-Cap (SPX +1.74%) vs Small-Cap (SML +18.67%), Over-the-Counter (COMPQ -2.17%) vs Listed (NYA +5.26%).


When comparing the year-to-date performances, you can see investors and traders favoring one strategy over the other. So, the question is one better than the other? Are these performances, shorter-term trends, or sustainable longer-term trends?


Which is better, growth style or value investing, Large-Cap stocks or Small-Cap stocks, Momentum factor or Quality factor, or listed stocks or over-the-counter stocks?


There are no right or wrong answers. It all depends on an individual investor's time horizon, risk, and volatility tolerance level.


From a technical perspective, a relative strength study between two markets using ratio analysis or relative strength comparison helps. The formula is quite simple. You divide one market over the other. The result of this division is the ratio or the relative performance between two markets over a timeframe. When the indicator is trending up, it shows the market is performing better than its counterpart. When the indicator is moving sideways, it shows that both markets are performing in-line with one another. On the other hand, when the indicator is trending down, it shows that one market is underperforming its peer.

Trend line analysis, supports, resistances, retracements, pattern recognition, divergences, and others can be applied to determine the sustainability of the trend performance, and most importantly, alert to trend reversals. Since the markets are in a constant state of movement, the ebbs and flows create bull and bear markets.


Relative strength analysis quantifies whether one market is performing better or worse than its counterpart over a specified timeframe. Of course, as with everything in the financial market, there are no guarantees, only probability, and you want this to be in your favor going into a trade or an investment. So, before you buy or sell, see how your security, market, or investment style is doing, relatively speaking.


Attached below are popular markets, indexes, and investment styles. Note that some of these relative performances are nearing critical technical levels. If you have been rattled by the recent market volatility, relative strength analysis may help to put everything into perspective, at least from a relative basis.


Source: Courtesy of StockCharts.com

Source: Courtesy of StockCharts.com

Source: Courtesy of StockCharts.com

Source: Courtesy of StockCharts.com

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