Relative strength is a number that drives investment fundamentalists and efficient markets theorists crazy. In the efficient markets theory, short-term price changes are seen as completely random, meaning that investors are best served by investing in indices and not trying to pick individual stocks. Fundamentalists believe that the long-term share price driver will be growth in earnings per share. Relative strength is usually claimed by chartists to be purely a technical indicator. It is true that technical analysis uses price changes as a very important component of its overall approach, but this is not the same as saying that relative strength is only a technical indicator and not a fundamental one.
All fundamental measures have to be related to the share price at one specific point in time.
Not only that, but the companies whose shares have outperformed the market more often than not are the companies with the strongest fundamental stories. Relative strength consistently brings to light companies with superior fundamentals, so it can be just as useful to those working from a fundamental viewpoint as it is to those using technical analysis. If shares with high relative strength tend to represent the companies with the best fundamental stories, it should not be a surprise to anyone that this indicator can help pick stocks that have a tendency to outperform. Relative strength strategies are an exciting tool for attempting to identify which shares will perform well in the future. The research by O'Shaughnessy seems to show that relative strength is one of the most important predictors of future price movements.