1 year Relative Strength measures a stock's price change over the last month relative to the price change of a market index. In the case of UK stocks, this is the FTSE All-share. US stocks are compared to the S&P 500. EU stocks are compared against the FTSEurofirst 300. It shows the relative outperformance or underperformance of the stock in that timeframe.
This figure is sourced from Thomson Reuters. It is calculated dividing the price change of a stock by the price change of the index for the same time period. e.g. A stock falling by 20% versus an index rising 20% would lead to a Relative strength calculation of 100 * ( 80/120 - 1) = -33%
Research indicates that relative strength is a negative signal in the near-term but generally a positive indicator in the medium (6-24 months).
A study by Hancock found a momentum-based strategy outperformed a broad universe of U.S. stocks by nearly 4% per year from 1927-2009. Research has shown that momentum is particularly beneficial when combined with a value style because the two are negatively correlated. Moskowitz and Grinblatt conclude that "A value-momentum combination mitigates the extreme negative return episodes a value investor will face (e.g., the tech boom of the late 1990s and early 2000 or a dismal year like 2008)"
However, momentum-based strategies have been shown to suffer badly during times of extreme market volatility such as the 2008/09 crisis.