Louise Yamada gave an interview yesterday that provides insight into how she incorporates relative strength analysis into her work:

• Yamada Sees Growing Chance Stocks May Break 2002 Lows
  (WATCH VIDEO)
  Nov. 18 (Bloomberg) — Louise Yamada, managing director of Louise Yamada Technical Research Advisors, talks with Bloomberg’s Tom Keene and Ken Prewitt about the outlook for the U.S. stock market. Yamada also discusses the duration of economic slowdown and investment advice.

Relative strength analysis is based on comparing the price performance of X vs. Y. It is NOT THE SAME as Welles Wilder’s RSI indicator. For example, we can compare the performance of a sector vs. the S&P 500 Index, or we can compare a stock and it’s peers against the sector index. This process gives us quantitative information that helps identify the leaders and the laggards. There are three simple ways to chart relative strength.

Method One: Percent Change from X Date
Let’s use the nine core Sector SPDRs as an example of how relative strength analysis is used to survey and monitor sector rotation.

Sector Performance Relative to S&P 500
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We choose a date (October 11, 2007 was the top) and plot $SPX, XLY, XLP, XLE, XLF, XLV, XLI, XLB, XLK and XLU on a percent change basis.