Sector Rotation RRG Analysis

Overview

This pillar uses Relative Rotation Graphs (RRG) to visualize which market sectors are gaining strength and which are falling behind. It's a powerful tool for anticipating capital flows and identifying the next winning sectors.

What It Does

It plots sectors on a unique chart with four quadrants: Leading, Weakening, Lagging, and Improving. This is based on their relative strength and momentum compared to a benchmark like the S&P 500. The analysis tracks the cyclical rotation of sectors through these quadrants, providing a clear map of market dynamics.

Why It Matters

Sector rotation is a key driver of market returns. By identifying sectors moving into the 'Leading' quadrant early, you can gain an edge in markets predicting sector performance. It provides a forward-looking perspective that simple price charts miss.

How It Works

First, a market benchmark (e.g., SPY) is selected. Then, the relative strength and momentum of each sector ETF (e.g., XLK, XLE) are calculated against that benchmark. These two metrics are then plotted as coordinates on the RRG chart. The resulting 'tail' for each sector shows its trajectory over time, indicating its rotational path.

Methodology

The analysis uses the JdK RS-Ratio for the x-axis and JdK RS-Momentum for the y-axis. RS-Ratio is calculated as (Sector ETF Price / Benchmark ETF Price). RS-Momentum is the rate of change of the RS-Ratio, typically using a 10-period simple moving average. Data is normalized and centered around 100 to create the four distinct quadrants.

Edge & Advantage

This pillar translates complex relative strength data into an intuitive visual, allowing you to spot emerging trends faster than traders relying on single-asset indicators.

Key Indicators

• JdK RS-Ratio

  high

  Measures the trend in relative performance of a sector against a benchmark.

• JdK RS-Momentum

  high

  Measures the rate of change (momentum) of the RS-Ratio.

• Quadrant Position

  medium

  Indicates if a sector is Leading, Weakening, Lagging, or Improving.

Data Sources

• StockCharts.com

  Provides free and paid RRG charts for major indices and sectors.

• Bloomberg Terminal

  Professional-grade terminal with advanced RRG analytics and customization.

• SectorSPDRs

  Provides daily price data for the 11 GICS sector ETFs used in the analysis.

Example Questions This Pillar Answers

• → Which S&P 500 sector will have the highest total return in Q3 2024?
• → Will the Technology Select Sector SPDR Fund (XLK) be in the 'Leading' quadrant on December 31st?
• → Will the Financials sector outperform the Industrials sector in the next six months?

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