Using Relative Rotation Graphs (RRG) for Stock Market Sector Rotation

By Greg Schnell, Lita Epstein

In the stock market, there is a lot of discussion about sector rotation. Although it’s usually softly discussed on the business news channels, they do not present charts to allow you to see this rotation. One of the most important changes in recent years is the visualization of sector rotation using relative strength. Even experienced chartists can be excited by having all of these innovative tools to keep up with some of the most advanced asset managers.

On the chart below, the $SPX is in the center where the crosshairs meet. The sector ETFs are plotted around this point. Because the $SPX is an average of the stock market, there are always some groups pulling the $SPX higher and some groups that are underperforming the average, pulling it lower. The vertical scale is momentum. The horizontal scale is relative strength.

stock charts sector rotation
Chart courtesy of StockCharts.com
RRG sector static.

When these sector ETFs appear in the top half — and more importantly, the top right corner — they are outperforming. That’s a powerful visual clue. Sometimes, the clue is more valuable as you watch it move into different quadrants.

Julius de Kempenaer developed a dynamic, visual model of watching the sector rotation relative to a common reference point. By using two axes to measure a stock, the model shows how a sector ETF can change in momentum and in relative strength compared to a central point.

The image above shows tails on each ETF. These tails are formed by connecting the dots for the previous locations for each week of the ETF on the chart. Using the mini chart in the top right corner, you can slide through time to see the sectors move on the StockCharts.com website.

By creating this model, the investor can see all the sectors at once. You can quickly see which sectors are ahead in momentum by looking at the top half of the chart. You can see which sectors are gaining strength to start leading, or notice which sectors are losing momentum and starting to trail the $SPX. You can extend the tails to 16 weeks, which is a little longer, to show the circular rotation. This picture is a still screenshot showing the circular motion around the $SPX. In the image above:

  • Point 1 allows you to change what you are comparing to.
  • Point 2 is where you add the ticker symbols you are watching.
  • In the top right corner, you can select daily or weekly. This is how you control the third dimension of time.
  • The tails’ colors are based on where the last data point is.
  • You can extend the tails from 0 to 30 weeks on the slider below the mini chart.
  • The lines headed toward the top right of the chart are moving toward becoming leaders. They can start in any quadrant, but the direction heading toward the top right is desirable.
  • Lines heading toward the bottom left are losing relative strength and momentum. The farther away from the center the last data point is, the worse the sector performance.

To use this tool on StockCharts.com, click on the Free Charts tab. Scroll down to locate one of the main charting panels called Relative Rotation Graphs (RRG) and click Launch RRG Chart. Choose one of the predefined groups in the list at the bottom and click on Animate. Watching the components spin as the slider in the mini chart on the top right moves through time is quite fascinating. If you stop the animation, the current date of the last endpoint is shown below the main chart.

Why is this charting style so important? It quickly allows you to find the next sector that is gaining strength. A directional line pointing to the top right corner is improving in momentum and relative strength.