RRG Charts

SPY returning to leading quadrant on Relative Rotation Graph!

The above Relative Rotation Graph holds some ETFs representing various asset classes and compares the against VBINX, a balanced index fund that holds 60% equities and 40% bonds.

The most striking observation is the fact that there is only one asset class on the right-hand side of the plot AND it is returning into the leading quadrant after rotating through weakening...

Despite all the talk about an over stretched market, a bull market on its last legs, etc. etc. the winner is ..... <drum roll> SPY!

 

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What's going on in Materials? (XLB)

The Relative Rotation Graph above holds the constituents of the Materials sector (XLB). The picture shows a fairly evenly distributed pattern with no real stocks standing out, maybe with the exception of MOS as it has the longest tail of all stocks on the graph while being at the lowest JdK RS-Ratio reading.

In my sector analysis in the previous blog, Materials and Financials were the only two sectors inside the improving quadrant. In that article, I focussed on XLF because of its long tail.

In this post, I want to take a better look at the members of the Materials sector especially as XLB just jumped away from its previous observation on the RRG and is now coming close to crossing over into the leading quadrant. Given the strong RRG-heading on the tail, there may be some interesting names to be found in the sector despite the fact that the sector itself is moving very close to the center of the RRG.

 

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Strong (relative) momentum based rotations among S&P 500 sectors, powerful tail for XLF

The almost vertical tails on the above Relative Rotation Graph for US sectors indicates a very clear (relative) momentum rotation, sending some sectors from North to South and vice versa.

The two most obvious tails on the RRG are for XLE, far away on the left while sharply hooking upward, and XLF which has the longest tail in the universe at the moment, indicating that a strong (momentum) move/rotation is underway.

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AAPL rotating opposite to BA on Relative Rotation Graph for $INDU

Watching the 30 members of the Dow Jones Industrials index on a Relative Rotation Graph always provides a great insight into what's going on under the hood of that universe.

The first quick takes from the graph above are a fairly evenly spread universe with no big outliers and AAPL heading into the weakening quadrant while still at the second highest JdK RS-Ratio reading. Also on the right-hand side of the RRG, we find BA moving opposite of AAPL into the leading quadrant from weakening, these are usually strong relative moves.

Inside the leading quadrant, there is a bit of a cluster of stocks all moving closer together which I will zoom into a bit more to see if anything interesting is going on there.

The tails that grab attention inside the lagging quadrant are INTC, NKE, and DIS. NKE and DIS are shooting deeper into the lagging quadrant for a few weeks already while INTC just rotated back into the lagging quadrant after a short rotation through improving.

Very close to the benchmark (center of the chart) are MRK and TRV with very short tails but positive RRG headings and close to crossing over into the leading quadrant.

 

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Commodities completely detached from other asset classes and equities picking up over bonds again

This Relative Rotation Graph for Asset Classes shows Commodities (DJP) far away in the bottom-left corner of the chart, completely detached from the others.

At, by far, the lowest readings on the JdK RS-Ratio axis, DJP moved higher on the JdK RS-Momentum axis for a few weeks but recently turned left again, diving even deeper into the lagging quadrant.

The Asset Class Rotation remains characterized by still NO asset classes inside the leading quadrant at all and only one, SPY (Equities), at the right-hand side of the graph. This makes a very good visualization for the TINA acronym.... There Is No Alternative!

TINA is used to indicate that investors keep coming (back) to equities as other asset classes do not provide enough returns despite a multi-year bull market, high valuations and overstretched trends.

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Are you looking at Industrial (XLI) stocks? ..Maybe you should.

This Relative Rotation Graph holds the top 50 (based on market cap) members of the S&P 500 Industrials sector index (XLI). This sector accounts for just over 10% of the S&P 500 market cap and is the fifth largest sector in this index. At the moment it does not seem to get the attention it might be deserving.

In the chart above a few stocks immediately catch the attention.

Very clearly in the lagging quadrant, we see GWW shooting further down into negative territory on a 225 degree RRG-Heading. Just behind it are PCAR and FAST at similar headings. The are all losing value on both axes at the same time and have relatively long tails.

In the improving quadrant, TDG stands out at the highest JdK RS-Momentum value in the universe but also AAL shows a positive heading and long tail which makes it worth looking at.

The green shaded area is a bit too crowded to inspect in this setup and needs to be zoomed in on which I will do further down.

 

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Will Technology (XLK) continue to lead the market higher?

The Relative Rotation Graph for US sectors shows four sectors with rotational patterns that catch the eye and deserve a further investigation.

Inside the lagging quadrant, these are Energy (XLE) and Financials (XLF) and inside the leading quadrant, I am looking at Technology (XLK) and Consumer Discretionary (XLY).

The balance of power on the RRG above is shifted to the leading quadrant. Five of the ten sector-ETFs on the RRG are positioned inside the leading quadrant (XLP, XLU, XLV, XLY, and XLK) with one inside the improving quadrant (XLRE). No sectors are currently found in the weakening quadrant, and four are inside the lagging quadrant (XLE, XLF, XLB, and XLI).

An interesting observation that can be made from this RRG is the clustering of eight sectors, all but XLE and XLF, in the top-right area and two that are more or less "detached" in and towards the bottom-left.

A quick take from such a rotation is that by simply avoiding the Energy and the Financials sector a portfolio manager already has a very good chance of outperforming the S&P 500. In this case, the situation is even more pronounced because of the fact that XLE and XLF are much further away from the center (benchmark) of the chart than the other sectors which are much more positioned around and closer to, the benchmark.

 

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Tech stocks inside $INDU looking good on RRG but avoid IBM and financials.

The Relative Rotation Graph for the 30 DJ Industrials (INDU) stocks once again presents us with some interesting insights.

From the picture above we can read that AAPL is still the strongest stock in this universe with the highest JdK RS-Ratio reading and still inside the leading quadrant. Inside the leading quadrant, but more towards the center of the chart, we find a cluster of stocks that deserve a closer look as they may hold good upward (relative) potential.

Within the top-left, improving, quadrant KO and INTC are on track towards leading at strong RRG headings (0-90 degrees). WMT has just started to curl down which is why I have not included it.

The weak stocks which should be avoided, are more pronounced. These are AXP and JPM still inside the weakening quadrant and IBM and GS already inside the lagging quadrant.

 

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No asset class in leading quadrant on RRG but SPY still strongest!

The Relative Rotation Graph for asset classes shows that not a single category is inside the leading quadrant at the moment and only one asset class, equities (SPY), is on the right-hand side of the plot.

The quick take from this reading is that only SPY, asset class equities, is in a relative uptrend against VBINX but losing momentum, hence positioned inside the weakening quadrant. The good news is that the distance from its current position to the 100-level on the Jdk RS-Ratio axis is still big enough to possible turn back up into the leading quadrant without crossing over into lagging.

A somewhat similar rotational pattern is seen inside the improving quadrant for IEF, Government bonds, and LQD, Corporate bonds. They are still in relative downtrends against VBINX but have been picking up some relative momentum lately. However, they are still well below the 100-level on the RS-ratio scale which means that there is still the risk for a rotation back towards the lagging quadrant, without hitting leading.

The two asset classes that stand out on this RRG are Commodities which are showing a very long tail while pushing deeper into the lagging quadrant. And Real-Estate which rotated towards the leading quadrant on a positive heading but last week seems to stall in its attempt to continue its improvement.

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Utilities (XLU) moving into leading quadrant, what are the strongest (and the weakest) stocks for this sector?

The Relative Rotation Graph above holds the stocks that, together, make up the Utilities sector index (XLU).

The keen observer may notice that there is one stock, NRG, positioned in the "gutter" of the chart. This is done on purpose as NRG is so far out to the right of the graph that it compresses all other stocks if I would include it, properly positioned, on the RRG.

I will have a look at NRG further down in this post.

The stocks inside the weakening and the lagging quadrant can fairly easily be identified. Same for improving. The leading quadrant is a bit more cluttered which makes it hard(er) to determine the individual ticker symbols. The best way to analyze an RRG like this is to click on one of the ticker symbols in the table below the chart and then "step" through the universe. This will "highlight" the selected stock while the others are dimmed so you can quickly identify the rotation of that single stock among its peers.

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