Can Travis Perkins' (LON:TPK) share price keep going up?

Travis Perkins is an adventurous large cap in the Home Improvement Products & Services Retailers industry, with a market cap of £3,501m.

Over the past year, the Travis Perkins share price has risen by 12.5%, which sounds pretty good.

But it’s important to put this in context and look at the market trend. After all, in a rising market where prices are up across the board, that gain might not be as remarkable as it seems.

As it turns out, the FTSE All-Share index is up slightly over the past year, after a tough second half of 2018. Its shares have a 1-year relative strength of 10.5%.

Read on to find out what the evidence shows may happen next...

Why relative strength really matters

Relative strength is an essential tool because it directly measures how a stock has performed in comparison with a benchmark.

Studies by Narasimhan Jegadeesh and Sheridan Titman, who are leading experts on momentum, show that stocks with the strongest price strength tend to keep up the pace for anywhere up to one year.

But what causes this?

The answer is that investor behaviour plays a big role. Academics point to two key drivers:

• Under-reaction - prices are slow to move up because investors are hesitant to bid prices higher in stocks that have already been on a strong run.

• Delayed over-reaction - investors chasing rising prices attract the attention of other investors, who follow them into those trades, pushing prices higher and higher.

So the answer is that momentum in stocks with strong relative strength is at least partly caused by a virtuous circle of human emotion. Investors have to constantly re-price these improving shares in their own minds. 

What does this mean for potential investors?

Travis Perkins is currently among the stocks with the strongest six-month and one-year relative price strength in the market. But momentum on its own is no guarantee of future returns. 

To get a better idea about whether this momentum will continue, it's worth doing some investigation yourself. Indeed, we've identified some areas of concern with Travis Perkins that you can find out about here.