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Relative Strength Alert: Will share buybacks at Relx (LON:REL) push its share price higher?

8th Mar by Ben Hobson

Relx (LON:REL) launched a new £600m share buyback programme in February - and the question for investors is how its share price will respond.

Finding stocks that can break-out and move higher on news updates and corporate actions is a tactic used by some of the world’s most successful traders. But it’s not a black-box strategy…

Indeed, knowing the factors that drive relative strength in share prices can help you find profitable momentum trades, too. I’m going to use Relx (LON:REL) as an example of how this can work.

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How has the Relx (LON:REL) share price performed?

Relx is a conservative, large cap in the Professional Information Services industry and it has a market cap of £32,584m.

Over the past year, the Relx share price has risen by 11.7%, 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 actually fell over the past year, which means that stock prices fell on average over that period. So Relx has actually done better than it seems. Its shares have a 1-year relative strength of 12.6%.

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

Why relative strength really matters

Relative strength is a crucial tool in the armoury of technical traders and investors. It’s an instant measure of how a stock has performed in comparison with a benchmark.

And while there are no certainties about which way a stock will move next, research shows that price trends often persist.

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. 

It won’t always happen - and it might take some time - but when momentum takes over, it can push prices higher and higher.

Next steps

Relx is currently among the stocks with the strongest six-month and one-year relative price strength in the market. A look at its StockReport could offer more insight into what’s driving the momentum in its share price - and whether that might continue.

To find more stocks like Relx, you'll need to equip yourself with professional-grade data and screening tools. This kind of information has traditionally been closely guarded by professional fund managers. But our team of financial analysts have carefully constructed this screen - Stockopedia’s Price Momentum - which gives you everything you need. So why not come and take a look?

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