Relative Strength
Definition
Relative strength is a measure of how an asset performs compared to another asset or benchmark over a given period. It is used to identify which assets are outperforming others, often as part of a momentum or trend-following strategy.
Why It Matters to Investors
- Helps identify leadership in markets: assets gaining strength relative to peers
- A core input in many systematic strategies, including trend-following
- Offers a data-driven way to allocate capital toward stronger performers
- Can improve risk-adjusted returns by avoiding weak or lagging assets
- Often signals emerging trends before they become broadly obvious
The TiltFolio View
TiltFolio Adaptive uses relative strength as one component of its broader decision-making framework, but not in isolation. The system doesn't simply rotate into the strongest-performing asset. Instead, it assesses relative strength in the context of the market's volatility regime. When volatility is falling, a signal that risk appetite is growing, stocks and other pro-growth assets tend to dominate. In contrast, when volatility is rising, often a sign of stress, the system tends to favor defensive asset classes like bonds or, in stagflationary regimes, commodities. This dynamic approach allows TiltFolio Adaptive to adapt not just to price leadership, but to the underlying macro and volatility environment. Relative strength matters, but it's interpreted through the lens of how volatility is behaving, and what that tells us about risk and opportunity.
TiltFolio Balanced does not use relative strength in its allocation decisions. Instead, it maintains its diversified allocation (50% bonds, 30% stocks, 20% gold) regardless of relative strength patterns, relying on strategic diversification to manage performance across different market conditions.
Both systems approach relative strength differently: TiltFolio Adaptive through dynamic analysis and TiltFolio Balanced through consistent diversification regardless of relative performance patterns.
Real-World Application
• Rotating from underperforming sectors into sectors showing stronger momentum
• Shifting allocations from developed markets to emerging markets based on performance
• Using ETFs or indexes to compare asset class trends over time
• Filtering assets based on their ranking versus a benchmark index