📚 PASS Research Analyst Certification Examination Difficulty: Intermediate ℹ️ Info   ~5 min read
📌 Chapter 15.9 — Technical Indicators

Imagine you are drafting a research note on a mid-cap pharmaceutical company that has been significantly outperforming its peers despite the Nifty50 index remaining stagnant. If you rely solely on a broad-market index to calculate Relative Strength, you may be missing the forest for the trees. Broad indices are often dominated by heavyweights in the banking or IT sectors, which can dilute the specific performance trends of niche industries.

As a professional analyst, your objective is to measure a company’s performance against a relevant peer group to ensure that your ‘alpha’ findings are genuine rather than just sector-wide momentum.

Selecting an inappropriate benchmark is a frequent error that leads to distorted conclusions about relative strength. For instance, comparing an IT services company to the Nifty Auto index provides virtually no meaningful insight into the stock’s management quality or competitive advantage. Instead, you should utilize sector-specific indices, such as the Nifty IT, Nifty Pharma, or Nifty FMCG. By doing so, you isolate the company’s performance from macroeconomic sector shifts and highlight its performance relative to direct business rivals.

Consider the practical case of a renewable energy firm. If you use the Nifty50 as the sole benchmark, you might interpret a 5% rise as ‘outperformance’ while the broader energy sector has actually surged by 15% due to government policy changes. In this scenario, your stock is actually a ‘relative laggard’ despite the positive absolute return.

By shifting your benchmark to the Nifty Energy index, you obtain a more realistic assessment of the firm’s execution capabilities relative to its direct industry cohort. This precision is what distinguishes a superficial ‘buy’ recommendation from one built on robust competitive intelligence.

Ultimately, the choice of benchmark defines the context of your narrative. When your valuation model suggests a stock is undervalued, relative strength analysis serves as the market’s confirmation of your thesis. If the stock consistently outperforms its sector benchmark, it indicates that institutional ‘smart money’ has begun to recognize the value you have identified. By refining your benchmark selection, you ensure that your technical indicators are mapped against a relevant peer reality rather than a diluted market average.

Nuance

⚠️ Nuance
The most common pitfall is the ‘one-size-fits-all’ benchmark bias, where analysts default to the Nifty50 regardless of the underlying security’s sector or market capitalization. Candidates often fail to realize that an index is essentially a basket of correlations; if your stock has a low correlation to the broad index, the index is a mathematically poor basis for comparison. Always remember that relative strength is a measure of comparative efficiency, not just absolute price movement, and using an incorrect benchmark renders the entire calculation statistically noise.

Check Your Understanding

Practice Question 1

An analyst is evaluating a mid-cap cement manufacturer. Which of the following, if chosen as a benchmark for Relative Strength, provides the most actionable insight for the analyst’s report?

Practice Question 2

Why might an analyst decide to switch from a broad-market benchmark to a sub-sector index when calculating the Relative Strength of a security?

This is a companion read for Section 15.9 — Technical Indicators from PASS Research Analyst Certification Examination by Akhilesh Gururani, available on Amazon Kindle.

Copyright © 2026 Akhilesh Gururani. All rights reserved.