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Feb 21st | 13.35 GMT
Relative Rotation Graph (RRG)
We take a look at this incredibly useful tool which gives a great visual representation into the cyclical rotations in equity markets, immediately steering you in the direction of sectors which have a higher probability of out performing the index return.
Written by; Aaron Sweeney | Updated on 13th June 2021
RRG for SP500 Sectors (Daily)
Areas of Interest
The red zone represents the highest probability area of sectors that could outperform the market index in the coming 12 weeks (Parameters: daily RRG).
In this graph, we can see XLY and XLK sectors rotating into the the improving sector which points towards strengthening in these sectors.
Sector cycles is often talked about in the US equity markets, as only a handful of sectors will outperform the benchmark at any one time. This is where RRG comes in as a clear and concise graph to illustrate the cyclical rotation in the different sectors whcih can steer investors towards to correct sector either for individual tock selection of sector ETF's. In the graph above, it shows the Consumer Discretionary Sector (XLY) and The Tech Sector (XLK) showing improving momentum indicating a bullish run may be on the horizon.
Likewise, sectors trading in the leading sector could be considered however its not uncommon for sectors to have already pushed on by the time they reach the leading quadrant. By focusing in the improving or even at the top of the lagging quadrants, this can give early indications as to the next cyclical rotations within the SP500 assisting in positioning. Further analysis is always utilised and decisions shouldn't be based on RRG alone as the sectors do not always move in perfect cycles however we find this a great tool to point you in the correct direction.
Similarly with sectors rotating out of the leading quadrant and into the weakling quadrant should be aware of risk exposure within their positions as it could point towards 3 months of weak momentum that is about to develop.
EXAMPLE
Sticking with the above graph we will focus into the XLY sector to use as an example. Now the RRG is showing improving rotation in this sector, we can look further into this sector using RRG to narrow down the improving and leading stock within this sector.
RRG for Consumer Discretionary (XLY, Daily)
As you can see from the XLY RRG above, they can often look quite messy depending how many constituents the sectors have. However the same principals apply, for long positioning we are mainly looking for stocks turning up towards improving, in improving or just moving into leading. As for the weakening quadrant - this should be considered a warning for prolonged consolidation of weakness until new cycles begin.
As for this graph, I would consider NKE/HAS/DG/AMZN/ VFC to be good opportunities for further analysis, similar with all the leading stocks. However, as mentioned, the leading quadrants sometimes contains stocks that have already ran their course and begin to rotate downwards therefore further analysis is always recommended. Stocks in the lagging quadrant may be gearing up for a move higher indicating value prices in the likes of TSLA and ETSY.
Like any technical indicator, the RRG doesn't move perfectly every time, Sometimes assets begin to rotate then quickly reverse back to where they came from showing no ability to continue therefore it is always just used as a starting point for sector and stock selection in order the build technical biases.
Depending on which platform you use to access RRG, you will get a table with RRG rotations which makes it easier to read at times. Stockcharts.com provided the table below alongside the RRG charts which makes it clear to see which stocks lie in which quadrant.
RRG for Consumer Discretionary (XLY, Daily)
Leading and Improving Constituents
