The 3 Month Relative Strength measures a stock's price change over the last 3 months relative to the price change of a market index. It shows the relative outperformance or underperformance of the stock in that timeframe.
Research indicates that relative strength is a negative signal in the near-term but generally a positive indicator in the medium (6-24 months).
A study by Hancock found that a momentum-based strategy outperformed a broad universe of U.S. stocks by nearly 4% per year from 1927-2009. Research has shown that momentum is particularly beneficial when combined with a value style because the two are negatively correlated. Moskowitz and Grinblatt conclude that "A value-momentum combination mitigates the extreme negative return episodes a value investor will face (e.g., the tech boom of the late 1990s and early 2000 or a dismal year like 2008)"
However, momentum-based strategies have been shown to suffer badly during times of extreme market volatility such as the 2008/09 crisis.
For detail on what we use as the relevant market index for a given geography, please refer to this help article.
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