Relative Strength Alert: Will the Rio Tinto (LON:RIO) share price keep rising?

Relative Strength Alert: Will the Rio Tinto (LON:RIO) share price keep rising?

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Rio Tinto (LON:RIO) recently reported its full-year results for 2018 and it's fair to say the market has been anticipating a good set of figures.

Over the past year, the Rio Tinto share price has risen by 15.8%, 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 Rio Tinto has actually done better than it seems. Its shares have a 1-year relative strength of 16.3%.

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.


What does this mean for potential investors?

Rio Tinto 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 Rio Tinto that you can find out about here.


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