Relative momentum — also called relative strength — is the comparison of an asset’s recent price performance against the performance of other assets in a universe or against a benchmark. An asset has high relative momentum when it has outperformed most of its peers over the trailing lookback period. Relative momentum strategies systematically favor relative leaders and avoid relative laggards — exploiting the empirical finding that recent relative outperformers tend to continue outperforming.

Relative vs. Absolute Momentum

Relative momentum evaluates an asset’s performance against other assets. Absolute momentum evaluates an asset’s performance against itself — specifically, against cash or a risk-free return. These two forms are complementary: relative momentum identifies which assets are the strongest; absolute momentum determines whether those assets are worth owning at all (positive absolute return trend) or whether the entire universe is deteriorating (negative absolute momentum across all assets). Combining them — selecting from relative leaders but only when they show positive absolute momentum — is the core insight of the Dual Momentum approach.

Relative Strength Indicators

Relative momentum is measured through relative strength indicators: typically, the ratio of an asset’s price to a benchmark index, or the ranking of its trailing return relative to peers. IBD’s Relative Strength Rating, for example, ranks U.S. stocks by their 12-month price performance relative to all other stocks, on a scale of 1-99. Stocks with RS ratings above 80 have outperformed 80% of all stocks over the prior year — a high relative momentum reading that is a key criterion in the CAN SLIM investment system.

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