Relative Strength Alert: Will the Tesco (LON:TSCO) share price keep rising?

Tesco (LON:TSCO) recently reported a 0.5% increase in Q3 group like-for-like sales - and, after a turbulent period for UK grocers, the question now for investors is whether or not Tesco's share price will finally recover some of the ground it has lost over the past decade.

Finding stocks that can break-out and move higher on news updates 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 Tesco as an example of how this can work.

How has the Tesco (LON:TSCO) share price performed?

Tesco is a balanced, large cap in the Food Retail & Distribution industry and it has a market cap of £22,427m.

Over the past year, the Tesco share price has risen by 11.4%, 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. So Tesco has actually done better than it seems. Its shares have a 1-year relative strength of 10.3%.

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.

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.

Why?

It's possible 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.

What does this mean for potential investors?

Tesco 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 Tesco that you can find out about here.