Relative Strength Alert: Will the Capita (LON:CPI) share price keep rising?

Shares in Capita (LON:CPI) have been in an uptrend in recent months, and the question now for investors is whether that price strength will continue.

Finding stocks with the potential to break-out as their popularity grows is a strategy used by some of the world’s most successful traders. 

Knowing exactly what drives relative strength in share prices can help you find profitable momentum trades. I’m going to use Capita as an example of how this can work.

How has the Capita (LON:CPI) share price performed?

Capita is a speculative, large cap in the Business Support Services industry and it has a market cap of £2,677m. The company has been besieged by setbacks over the past two years, drastically pulling down its share price. And while the stock is nowhere near recovering that lost ground, there are signs of improving momentum in its shares.

In terms of relative price strength against the FTSE All-Share index, shares in Capita are up by 49.3% over six months and up by 44.2% over one year.

Relative strength is a useful 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 leading experts on momentum show that stocks with the strongest price strength tend to keep up the pace for anywhere up to one year. A big part of the reason for this is down to investor behaviour. In particular, it's caused by: 

• 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.

In both cases, stocks with positive price momentum often see their prices trend higher.

What does this mean for potential investors?

Capita 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 Capita that you can find out about here.