Table of Contents

Introduction

In modern markets, narratives change faster than ever, and fundamentals often reveal the true picture far later than investors hope. Quarterly numbers tell you what has happened, but rarely what is happening right now. This is why Relative Strength becomes invaluable. It offers a real-time window into market behaviour by showing which companies are quietly attracting institutional money and which ones are steadily losing market interest.

There are many interpretations of RS in the trading world. Some investors compare stock prices to the index manually, some use simple ratios, and others look at generic momentum indicators. But not all methods give reliable, consistent signals. This guide focuses specifically on the William O’Neil RS Rating approach — the framework used in CANSLIM and MarketSmith, and the one responsible for identifying nearly every major stock market winner long before they became famous.

Relative Strength offers three life-changing advantages for investors. It lets you see where smart money is flowing before the crowd realises it. It helps you separate genuine leaders from stocks that only look good on the surface. And, most importantly, it reveals emerging strength long before fundamentals fully show the turnaround.

This guide is divided into three levels.
Level One gives you the foundation.
Level Two teaches you timing and execution.
Level Three helps you build a complete RS system the way institutional investors do.

Whether you prefer long-term investing or fast-paced trading, what you are about to learn becomes the backbone of intelligent stock selection.

Part I. The Origins and Evolution of RS

The idea of comparing a stock’s strength to the market existed loosely before the 1960s, but it was Robert Levy who first turned it into academic research. He proved that stocks with strong past performance tend to continue outperforming — something we now call the “momentum anomaly.”

William J. O’Neil took that academic insight and transformed it into a practical tool for real-world traders and investors. He created the RS Rating — a score from 1 to 99 that instantly tells you how a stock performed compared to thousands of others. He also introduced the RS Line, a visual trend line that reveals whether the stock is outperforming the index at any moment. These two innovations turned RS into one of the most powerful leadership-detection systems ever built.

Over the decades, RS evolved from a simple comparison tool into a complete strategy. Early traders used their eyes to compare charts. In 1967, Levy published formal RS research. In 1978, RSI came along, though it had nothing to do with RS despite the similar name. In the 1980s and 1990s, O’Neil integrated RS deeply into CANSLIM, refining how it should be used. And today, RS is used in quantitative models, smart money tracking algorithms and institutional screening tools.

Part II. Core RS Concepts

What is RS in the O’Neil System

Relative Strength in the O’Neil system answers one essential question:
Is this stock behaving better than the market or worse than the market?

To measure this, O’Neil created two components: the RS Rating and the RS Line.

The RS Rating compares a stock’s twelve-month performance against every other stock. If a stock has RS 99, it means it outperformed 99 percent of all stocks in the market. RS 90 means it outperformed 90 percent. RS 70 is the point where acceptable leadership begins. Anything below RS 50 signals underperformance, and RS under 30 signals consistent weakness. This rating system gives you an immediate understanding of whether a stock deserves your attention or not.

The RS Line plots how the stock is performing compared to the index. When the RS Line rises, the stock is outperforming. When it falls, the stock is lagging behind. When it moves sideways, the stock is moving in line with the overall market. The crucial insight is that the RS Line often hits a new high before the stock’s price breaks out. This tells you that institutions are accumulating quietly even though the stock hasn’t yet made a visible price move.

Together, the RS Rating and RS Line act like a diagnostic tool. The rating shows long-term strength. The line shows immediate behaviour. A stock with RS 90 and a rising RS Line is powerful. A stock with RS 90 but a falling RS Line is slowing down. A stock with RS 60 and a rapidly rising RS Line may be an emerging leader worth studying.

Why Time Horizon Matters in RS

RS is not meaningful unless you specify over what time period you’re judging performance. Short-term RS (like one-month) reveals sudden momentum bursts and early institutional activity. Three-to-six-month RS shows developing leadership. Twelve-month RS shows proven leadership and forms the base of the RS Rating. Eighteen-month RS highlights long-term structural leadership.

O’Neil relied on twelve-month RS for ranking, while using three-to-six-month RS slopes for timing. This blend captures both long-term winners and early breakouts.

How Long-Term Investors Should Use RS

Long-term investors should prioritise stocks that maintain a high RS Rating for extended periods. They should observe whether the RS Line has been rising consistently over many weeks or months. The stock’s sector should also show strong RS because individual stocks rarely outperform if their entire sector is weak.

When a stock’s RS begins to weaken persistently, long before earnings or news show any trouble, it becomes an early warning that leadership is fading. This allows a long-term investor to exit before serious damage occurs.

How RS Captures Turnarounds Early

Turnaround stories are often invisible in financial statements until very late. But RS picks them up far earlier. First, the RS stops falling. Then it quietly begins rising even though fundamentals may still appear weak. Next, the RS accelerates sharply as institutional investors anticipate an improvement. Finally, the RS peaks weeks or months before the fundamentals peak.

In other words, RS exposes internal strength long before numbers confirm it.

Part III. RS Mastery

Combining RS with Fundamentals

RS tells you whether the market likes the business. Fundamentals tell you whether the business deserves that attention. The most powerful stocks in history are the ones where RS and fundamentals both align — where leadership in price also reflects leadership in earnings, margins, cash flow and return on capital.

If a company has excellent fundamentals but low RS, the market is not rewarding it. If a company has high RS but weak fundamentals, the strength may not be sustainable. True long-term opportunities emerge when both sides confirm each other.

RS Strength vs RS Acceleration

RS Strength measures the level of performance. RS Acceleration measures the change in speed of that performance. A stock can have RS 80 (already strong) but what makes it explosive is the acceleration that pushes RS from 60 to 70 to 80 rapidly. This acceleration reveals emerging leadership before it becomes widely visible.

Fake RS: How to Avoid False Signals

Many stocks show strong RS temporarily because they decline less than the index during a correction or bounce briefly from oversold levels. Some show RS because of one-time news events or low liquidity. These moves do not reflect real leadership. Real RS appears with consistent price behaviour, strong volume signatures, rising sector strength and a stable pattern of higher highs and higher lows.

RS Divergence Between Stock and Sector

A bullish RS divergence occurs when a stock’s RS improves while the sector weakens. This suggests hidden strength and early accumulation. A bearish divergence occurs when the sector is strong but the stock’s RS declines. This signals the beginning of distribution.

RS Thresholds that Matter

RS above fifty indicates early improvement and should place the stock on your radar. RS above seventy represents confirmed leadership. RS above eighty marks a strong leader. RS above ninety is elite territory. RS above ninety-five usually appears in the earliest phases of future multi-baggers.

Part IV. Advanced RS Timing and Execution

The Moment RS Turns from Weak to Strong

A meaningful RS turnaround begins when the RS slope stops declining and starts curling upward. Price volatility reduces, volume becomes more controlled and shorter-term RS begins outperforming longer-term RS. This early change in RS behaviour often precedes a major trend reversal.

How RS Behaves Before Breakouts

Before a major breakout, the RS Line frequently reaches a new high even while the price is still consolidating. This indicates institutions are buying on dips, absorbing supply quietly. The market is showing strength beneath the surface, even though the price has not yet reflected it.

Perfect RS and Price Alignment Before Big Moves

Before a powerful breakout, three things usually happen simultaneously. The RS Line moves to new highs. The price enters a period of tight, low-volatility trading, showing that sellers have disappeared. And the sector begins to strengthen, providing a supportive environment. When all three occur together, the probability of a sustained breakout becomes extremely high.

Using RS Acceleration for Early Entries

RS acceleration is the earliest sign that smart money is entering a stock. When RS begins to rise faster than the stock price and does so consistently, it signals strong interest building beneath the surface. Entering during this phase provides the best combination of low risk and high potential reward.

High-Probability RS and Price Patterns

Some patterns consistently appear before big winners run. Prices compress into extremely tight ranges. RS stays elevated above eighty. Volume dries up as sellers disappear, then suddenly expands on breakout. And sector leaders often move first, creating a tailwind for the entire group.

Identifying Leaders at Market Bottoms

The earliest leaders in new bull markets are almost always stocks whose RS improved during the previous correction. These stocks reveal unusual strength at the exact moment the rest of the market is weak.

Recognising RS Breakdown Patterns

Leaders do not collapse suddenly. They weaken gradually. Their RS falls from ninety to eighty, then to seventy, then breaks below fifty. The RS Line loses slope. The sector begins weakening. These signals appear long before a dramatic price fall.

Temporary RS Dips vs Real RS Reversals

Temporary dips recover quickly and do not break long-term RS structure. Real reversals break the RS trend decisively and fail to regain their former strength.

When RS Levels Become Dangerous

Once a former leader falls below RS fifty, its best days are usually behind it. This level marks a transition from leadership to laggard behaviour.

Adding to Winners Using RS

Adding to a winning position becomes safest when RS strengthens after a consolidation, especially when the RS Line makes new highs before price.

Position Sizing with RS

Higher RS stocks deserve more weight because they reflect market confidence. Low RS stocks introduce unnecessary drag on performance.

Riding Long-Term Leaders

Long-term winners often experience short-term volatility. The best approach is to focus on the long-term RS slope and avoid being shaken out by minor fluctuations.

How RS Behaves Across Market Conditions

Different cycles require different RS interpretations. In bull markets, shorter-term RS reveals early momentum. In bear markets, twelve-month RS becomes critical. In sideways markets, RS slope becomes more important than raw RS numbers. When markets are choppy, RS above seventy acts as a necessary filter.

Combining Breadth, Sector RS and Stock RS

When the overall market shows broad participation, sectors are strong and individual stocks show rising RS, leadership becomes extremely clear and reliable.

Filtering Stocks in Choppy Markets

In volatile conditions, the only stocks worth attention are those with RS above seventy and strong sector backing. Everything else becomes noise.

Part V. Building a Complete RS System

A Multi-Timeframe RS Model

Combining different RS timeframes provides a holistic view. One-month RS reveals acceleration. Three-and-six-month RS confirms trend development. Twelve-month RS shows long-term leadership. Together, they create a complete picture of strength.

Weighting RS Horizons

Long-term investors rely more on twelve-month RS, while swing traders rely more on one-month and three-month RS. The exact weighting depends on your strategy.

Detecting RS Momentum Shifts

RS shifts become clear when shorter-term RS overtakes longer-term RS. This indicates a fresh wave of strength entering the stock.

Ranking Sectors Using RS

Leadership begins at the sector level. Ranking sectors by RS and identifying which ones are accelerating helps you find where capital is flowing.

Combining Sector RS and Stock RS

The strongest stocks almost always come from the strongest sectors. This alignment multiplies the probability of success.

Detecting Sector Rotations Early

Sector RS often changes direction before price trends shift. This early signal allows you to anticipate major market narrative changes.

Portfolio Construction Using RS and Volatility

Combining RS strength with volatility analysis helps you size positions intelligently, reducing risk while keeping exposure to leaders.

Rebalancing with RS Drift

As RS updates weekly, weaker names drop off naturally and stronger names rise. Rebalancing with this drift keeps your portfolio fresh.

Building a Leaders-Only Portfolio

A true leaders-only portfolio includes only RS above eighty and preferably RS above ninety for highly concentrated portfolios.

Unified RS and Fundamentals Score

Combining RS with earnings growth, ROCE, margins, cash flow quality and debt levels produces a powerful multi-factor ranking system.

RS Confirms Fundamental Improvements Early

When a company begins improving internally, RS reflects it long before the financial statements do.

Structural vs Cyclical RS

Structural leaders maintain RS across multiple cycles. Cyclical leaders lose RS as soon as their sector cycle ends.

RS Across Macro Regimes

Inflation, interest rate cycles and liquidity shifts have major effects on leadership. RS reacts early and reveals regime changes weeks or months ahead.

Using RS to Detect Major Regime Shifts

A dramatic change in sector RS ranking suggests a shift in the entire economic environment.

RS and Market Breadth Together

Strong RS and strong breadth create a healthy market. Weak breadth with isolated RS leaders warns of fragility.

Automating RS Screening

RS can be automated through scanners that look for high RS, rising RS and RS acceleration.

A Self-Correcting RS Watchlist

As RS updates, laggards naturally fall away from your list and new leaders take their place.

Multi-Factor RS Screener

Combining RS with volatility, volume and sector trends produces highly accurate results.

RS Rules to Avoid Large Losses

Define strict rules. Exit when RS breaks below fifty. Exit when the RS slope breaks. Reduce exposure when sector RS weakens.

Knowing When Leaders Turn into Laggards

Leaders begin losing steam long before the price collapses. RS deterioration reveals this transition clearly.

RS Based Exit Strategies

Using RS slope breaks, RS Rating declines and sector weakness gives you emotion-free exits.

By the time you finish this guide you will understand RS the way institutional investors use it. Level One builds your foundation. Level Two helps with timing and execution. Level Three shows how to structure an entire system around leadership.

This approach allows you to spot the earliest signs of strength, avoid laggards, protect gains and compound wealth with clarity.

Relative Strength the O’Neil way is far more than an indicator. It is a window into market psychology, institutional accumulation and the true internal health of a stock. It shows you what the market believes long before earnings, news or narratives reflect it. When you combine the RS Rating, the RS Line, sector RS, multi-timeframe RS and RS-based exits, you begin to operate with an investor’s version of X-ray vision.

Master RS, and the market begins revealing its secrets long before the rest of the world notices.

If you’re also curious about what the world’s greatest investors look for in a business — beyond Relative Strength — I strongly urge you to read the insightful article “What Buffett and Munger Look For in a Business” on DalalStreetLens. It presents a complementary perspective: how Warren Buffett and Charlie Munger evaluate companies using qualitative factors like moats, management quality and capital allocation. Combining their timeless wisdom with the RS Rating framework gives you a rare two-pronged advantage: what the business deserves, and where the market is rewarding it.

Read it here: What Buffett and Munger Look for in a Business

Harsh Bhojwani

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Harsh is the creator of Dalal Street Lens, where he writes about investing, market behaviour, and financial psychology in a clear and easy way. He shares insights based on personal experiences, observations, and years of learning how real investors think and make decisions.
Harsh focuses on simplifying complex financial ideas so readers can build better judgment without hype or predictions.
You can reach him at imharshbhojwani@gmail.com