Relative Strength Alert: Will the Tate & Lyle (LON:TATE) share price keep rising?

Tate & Lyle (LON:TATE) share price was remarkably resilient when the rest of the stock market was tanking towards the tail end of 2018. Why was this balanced, large-cap such a strong performer over the course of those months?

Over the past year, the Tate & Lyle share price has risen by 26.6%, which sounds pretty good. Against the FTSE All-Share, its shares have a 1-year relative strength of 24.4%.

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.

What does this mean for potential investors?

Tate & Lyle 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 Tate & Lyle that you can find out about here.