The Relative Rotation Graph for US sectors shows seven sectors clustered around the benchmark in the middle of the graph (SPY) and three of them further away.
XLE is more or less detached from the rest of the universe while XLP and XLY are breaking away together and heading deeper into the lagging quadrant.
Within the cluster of sectors closer to the center of the chart, Real Estate (XLRE) and Industrials (XLI) are showing interesting rotational patterns backed by long(er) tails.
Summary
- Energy detached from other sectors, strong rotation at the moment but can it hold this pace?
- Sector rotation negative for both consumer sectors at the moment
- RRG suggests sector rotation out of Real Estate into Industrials
Energy - XLE
The only sector inside the improving quadrant is Energy (XLE). Still at the lowest JdK RS-Ratio reading but also at the highest, by far, JdK RS-Momentum reading. This combination of readings puts XLE in the top-left corner of the RRG while heading East towards the leading quadrant.
Given its position, it is still questionable if the leading quadrant can be reached without one more rotation at the left-hand side of the RRG.
The upward break in the price chart is very clean and holding up well. The relative picture is a little less convincing.
The raw RS-Line is still camping well below its former breakout level which will now act as resistance on the way up. The improvement after the relative low is showing up in the RRG-Lines but has not been strong enough yet to completely turn the tide and as you can see the power behind the RS-Momentum move is already starting to wane.
This causes the sideways movement on the RRG, albeit heading East (positive) this raises concern about the ability of this move to continue straight into the leading quadrant, i.e., a new relative uptrend.
Unless relative momentum starts to pick up real soon, we have to take into account the possibility for another rotation at the left-hand side of the RRG before the Energy sector can show some real positive energy and move over into the leading quadrant. Still cautious.
Zooming in
With Energy out of the way, we can have a closer look at the rotations that are taking place closer to the benchmark.
The ones that catch my attention are the two consumer sectors, -Staples and -Discretionary and Real Estate and Industrials.
The two consumer sectors, Staples and Discretionary very often move in opposite directions. However, since April of this year, they are running very close to each other and tracing out a similar rotational pattern.
Moving in opposite directions AND on opposite sides of the Relative Rotation Graph are Real Estate (XLRE) and Industrials (XLI).
XLRE has just crossed over into lagging after a rotation through improving and is now picking up downward momentum again while XLI is showing a rare rotational pattern. Also see my previous blog here.
Consumer Staples - XLP
The long-term trend for Consumer Staples is still intact and contained within the boundaries of a rising trend channel. However, the formation that is unfolding since the beginning of this year holds a lot of characteristics of a Head & Shoulders reversal pattern and if not perfectly an H&S it sure looks "toppy."
Whatever you want to call it, the behavior of XLP at the horizontal support line at $ 54 will be crucial for the development of its price going forward. Based on the pattern that is tracing out and the lower high that is already in place I judge the odds to be in favor of a break lower followed by an acceleration downward.
This type of situation is already showing on the relative graphs where the raw RS-Line confirmed its downtrend by topping out again against falling resistance and breaking below previous lows. The JdK RS-Ratio line picked up a relative downtrend in the middle of 2016 when it crossed below a 100 and continued to decline until early 2017.
The sideways movement of the RS-Line caused a recovery for RS-Ratio and a very brief rotation through leading again a few months ago. But together with the break below the slightly up-sloping support line (up sloping solid red on the chart), RS-Ratio started to fall back, and XLP is now pushing rapidly further into the lagging quadrant.
Consumer Discretionary - XLY
The picture for the Discretionary holds a lot of similarities.
On the price chart the uptrend is intact but over the past few months has not been able to push to new highs. As a matter of fact, the last three peaks in XLY are all set at roughly the same level, $ 92.50.
At and just above $ 87.50 a double support level is now showing up. On the one hand, there is horizontal support offered by the last three lows in price while the rising support line is currently running just above $ 87.50. Just like for Staples, this support level will be crucial for determining the near future price behavior for the Discretionary sector.
A break lower sets the stage for an acceleration lower towards the next major support level which is only found near $ 80.
In relative terms, the break in the raw RS-line is obvious, and RS is steadily moving lower. In the RRG-Lines the RS-Ratio line is dropping steadily with RS-Momentum rolling over again after a small consolidation. When RS-Momentum starts to pick up the downward pace again, then expect XLY to rotate further into the lagging quadrant.
For the time being both consumer, sectors are better avoided.
Real Estate - XLRE
As the XLRE ETF does not have enough data points yet I am using the underlying index $SPRE for the analysis.
What we see here is a clean break out of a descending triangle in the raw RS-Line which will very likely lead to further deterioration of relative strength against SPY in coming weeks.
The RRG-Lines are backing such a scenario. The JdK RS-Ratio line dropped below 100 in September 2016 and never managed to cross back up. The JdK RS-Momentum line oscillated a few times around 100 causing XLRE to complete rotations at the left side of the RRG.
The recent break lower in raw RS causes the RS-Momentum line to roll over again and push XLRE into the lagging quadrant once again. The long tail on XLRE indicates that there is plenty of (negative) power behind this move and suggests that money is flowing out of the Real Estate sector.
Industrials - XLI
As the RRG at the top of this article is a so-called "closed universe," within which relative strength is a zero-sum game, it means that opposite every loss of relative strength there must be a gain of relative strength.
Where relative strength is negative for XLRE above, it seems to be picking up for the Industrials sector.
The RS-chart for XLI shows a rising trend out of the (double) bottom that completed early 2016. After a long sideways move RS jumped higher again towards the end of the year and set a peak in December 2016.
Since that peak, a (symmetrical) triangle like formation is tracing out, and the market is currently testing the upper boundary of that pattern. It will be very interesting to monitor what will happen here in coming weeks.
The RRG-Lines have converged around the 100-level as a result of the sideways movement in relative strength. The most recent moves are pushing both lines above 100 and the Industrials sector into the leading quadrant.
As I mentioned in my previous blog the rotational pattern for XLI is infrequent but holds very promising odds for a good (relative) return.
We're not there yet on the chart of the RS-Line itself but the RRG-Lines are sending positive signs and the trend on the price chart is very strong. With money rotating out of Real-Estate it may very well find its way into the Industrials sector.
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Julius de Kempenaer | RRG Research
RRG, Relative Rotation Graphs, JdK RS-Ratio, and JdK RS-Momentum are registered TradeMarks by RRG Research
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