Every investor faces the same fundamental question: of the thousands of available investments at any given moment, which ones deserve my money right now? Most approaches to answering this question rely on analysis, prediction, or opinion — studying a company's financials, forecasting economic conditions, or listening to what analysts expect.
Relative strength takes a different approach entirely. Rather than trying to predict which assets will perform well, it identifies which assets are performing well right now — and allocates capital accordingly.
What Is Relative Strength?
Relative strength is a measurement of how one asset is performing compared to other assets over a given time period. An asset with high relative strength is outperforming its peers. An asset with low relative strength is underperforming. By systematically identifying and rotating toward the strongest performers — and away from the weakest — a relative strength strategy attempts to keep your money working where markets are rewarding investors most.
A Simple Analogy
Imagine you're watching a horse race. Relative strength doesn't try to predict which horse will win before the race starts — it waits until the race is underway, watches which horses are pulling ahead, and bets on the horses that are already leading. It accepts some loss of early performance in exchange for the evidence that a horse has actual momentum, rather than just promise.
The Concept of Momentum: Why Strength Tends to Persist
The reason relative strength works as an investment strategy is the same reason trend following works: markets exhibit momentum. Assets that are performing well tend to continue performing well, and assets that are performing poorly tend to continue performing poorly — at least for meaningful periods of time.
This runs counter to the intuition of many investors. Shouldn't you buy what's cheap and underperforming, and avoid what's already run up? Not necessarily — and academic research has consistently demonstrated why.
When capital flows into an asset class or sector — technology stocks, energy companies, healthcare — that capital tends to attract more capital. Fund managers who benchmark against indexes must buy what is rising to avoid falling behind. Individual investors follow the news, which covers what is performing well. The result is that winning assets often continue to win, and losing assets often continue to lose, for longer than most investors expect.
The Academic Foundation
The momentum effect — the tendency of recent winners to continue outperforming and recent losers to continue underperforming — is one of the most robustly documented anomalies in financial markets. It has been observed across virtually every asset class, geography, and time period studied. It was first formally documented by Jegadeesh and Titman in 1993 and has been replicated hundreds of times since.
Relative Strength vs. Absolute Strength
It's important to understand the distinction between relative strength and absolute strength, because at Dauble+Worthington we use both.
Relative strength answers the question: which assets are performing best compared to each other? If technology is up 20% and healthcare is up 5%, technology has higher relative strength, even if both are positive.
Absolute strength answers a different question: is this asset actually in a positive trend at all? An asset can have the highest relative strength in a group while still declining — it's simply declining less than its peers. Absolute strength signals help us avoid being "the least bad" option in a market where everything is falling.
Combining both filters — relative and absolute — helps ensure that we are rotating toward assets that are not just leading the pack, but actually performing in a meaningfully positive way on their own terms.
How We Apply Relative Strength at Dauble+Worthington
Our investment process uses relative strength as a core input across multiple portfolio strategies. While we don't disclose the specific parameters of our proprietary signals, the general process follows a disciplined framework:
Define the Investment Universe
For each portfolio, we define the set of assets being considered — whether that's equity sectors, market indices, individual stocks, or a combination. This universe is the playing field from which we select.
Measure Relative Performance
We measure and rank the performance of each asset in the universe across multiple time horizons — not just recent performance, but performance over different lookback periods. This creates a more complete picture of which assets have sustained momentum.
Apply Absolute Trend Filters
Even the strongest relative performers are filtered through absolute trend signals to confirm they are in genuinely positive territory — not simply declining less than others.
Allocate and Monitor
Capital is allocated to the assets meeting our criteria. The process repeats on a systematic schedule, rotating toward new leaders when rankings change and moving to defensive positions when conditions deteriorate broadly.
What Relative Strength Is Not
It's worth being clear about what this approach does not involve — because there are common misconceptions.
- It is not chasing hot stocks. Relative strength operates systematically according to rules. It is not reading about what's popular on financial media and buying it.
- It does not require predictions. We are not forecasting which sector will outperform next quarter based on economic analysis. We are observing which sectors are currently outperforming and following that signal.
- It is not infallible. Trends reverse. Relative strength signals can be wrong, and when they are, we will experience short-term losses as we rotate. This is the cost of the strategy, and it is an accepted part of the process.
The Core Advantage
Relative strength investing removes opinion from the decision-making process. Instead of asking "what do I think will perform well?" — a question loaded with bias and uncertainty — it asks "what is actually performing well right now?" The answer to that question is objective, measurable, and available to anyone willing to look at it consistently and act on it systematically.
Putting It All Together
Tactical asset allocation, trend following, drawdown management, and relative strength are not four separate ideas — they are four dimensions of the same investment philosophy. Trend following tells us whether conditions are favorable for risk-taking. Relative strength tells us where within that environment to allocate capital. Drawdown awareness keeps us honest about the cost of being wrong. And tactical allocation is the framework that ties all of these together into a coherent, rules-based investment process.
That is the philosophy at the core of everything we do at Dauble+Worthington. We don't predict. We observe, measure, and respond — consistently, systematically, and without emotional interference.
Next in This Series
Our next article addresses one of the most common objections to our approach head-on: why market timing has a bad reputation — and why what we do is fundamentally different from the emotional market timing that destroys wealth.