IBD's relative strength line, or RS line for short, is one of the most effective indicators when looking for excellent stocks. But don't confuse it with another important tool with a similar name, the Relative Strength Rating.
Despite sharing a similar name, these two indicators measure different things. It's important that investors discern between the two when studying a stock. Is one more important than the other?
How To Buy Stocks: RS Line Vs. RS Rating
The Relative Strength Rating is a proprietary IBD rating. It compares one particular stock's price performance over the last year to all the other stocks in our database — including ETFs. The rating goes on a scale of 1 to 99.
The RS Rating of 99 tells you the stock is beating 99% of all the other U.S.-traded stocks. If it were at 1, that would mean 99% of all other stocks are beating it in terms of 12-month performance.
The RS line, by contrast, is simply a ratio of the performance of a particular stock vs. the S&P 500 index.
With the RS Line, you're getting a gauge of a stock's relative performance vs. the market benchmark. If the line is trending up, that means the stock is outperforming the S&P 500. If it's going down, the stock is lagging the S&P 500. The RS line is found in all IBD Charts, plotted in blue.
In IBD's premium charting tool, MarketSurge, you have the ability to change the basis of comparison to another index such as the Nasdaq composite. You can also use an industry group for comparison. But the default is the S&P 500. MarketSurge also offers three- and six-month RS Ratings that are more sensitive to shorter-term price movements.
Which Indicator Is Better?
Which indicator should investors give more weight to? What do you do when a stock has an RS line that's lagging, but the RS Rating is bullish?
It's best when both the line and rating confirm strength.
In July through September 2023, Microsoft formed a cup base (1). At the Nov. 10 breakout (2), the Relative Strength Rating was 95 and the RS line was at new highs (3). At a subsequent breakout Jan. 11, 2024 (4), the RS Rating was 90 and the RS line was near highs. Both helped predict the stock's run into a March peak.
How To Buy Stocks: Indicator Drawbacks
The Relative Strength Rating does a good job filtering leading stocks. But it can be slow to move.
For example, Qualcomm back in 1999 had a 2,000% move in one year. Of course, it had a Relative Strength Rating of 99. But even when it plunged 40% off its highs, it was still up over 1,000% for the year. So the RS Rating remained at 99 even as the stock was falling.
The RS line can react to a stock's downturn faster than the rating. Also, the line is valuable in telling you if a stock is outperforming the market enough that it's worth taking on the risk of owning, rather than just take advantage of the diversification the S&P 500 offers.
Many leaders have their relative strength lines going to new highs at the same time or even before the price does. That's one of the signature aspects of a leading stock. When that happens, a blue dot will show up on the RS line in MarketSurge charts.
