Sticking with the theme from this past week’s podcast, I’m going to focus on using Relative Rotation Graphs to explain what’s happening under the surface in the market today.
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Anyway, back to the stock market…
If you scroll down, you’ll find one of my many favorite tools to use when analyzing the markets. It’s called a Relative Rotation Graph (or “RRG” for short). You can put any benchmark in the middle, at the zero-point of the x/y axis and then compare any other investment (or group of investments) to that benchmark. Furthermore, when any of those investments are in the:
For instance, if you wanted to see how the different types of bonds were performing as compared to the Barclays Aggregate Bond Index (a largely agreed-upon benchmark for “the bond market”), you’d put the symbol AGG at the zero point on the RGG, and then plot all the different types of bond investments you wanted to on the chart and see four things:
Above, I’ve plotted an RRG with the S&P500 at the center (zero) point, and then plotted all the investments in my sector and industry group inventory of exchange traded funds (ETFs) within the US stock market:
Right off the bat, can you see what I see?
I highlighted above that many of the offensive investments that performed really well in late-2020 into early-2021 are now acting poorly. These are sectors such as IPO stocks, Technology, Genomics, Solar, Online Retail, and Biotech.
Below, I zoomed-in to the right of that tangled mess on the chart above to see if there were any “jackknife” patterns occurring and I found two: Both Steel stocks, as well as Metals & Mining companies are reversing out of the “Weakening” quadrant, back up into the “Leading” quadrant. This is typically a very bullish (good) pattern when it occurs.
Then, I zoomed-in to the left side of the RRG to see what positive evidence I might find and discovered that Gold Mining Stocks are setting up (meaning, they’re leaving the “Lagging” quadrant, headed into the “Improving” quadrant). Scanning to the right, I also noticed additional defensive investments exhibiting the same kind of movement on the graph, including Staples (both large and small-cap), Industrials, Blue Chip/High Dividend Payers, Low-Volatility stocks, Real Estate, Home Builders, etc.
It’s important to keep in mind that the closer an investment is to the middle of the RRG, the more it “moves with the market.” Said another way, if you can find the symbol IYR (Real Estate) just above and left-of-center, it is in fact heading out of the Improving quadrant into Leading… but one shouldn’t expect large, relative out-performance when an investment is this close to the benchmark (center), itself.
My friend, Julius de Kempenaer invented this tool more than a decade ago, but it became public for the first time back in 2011 when he presented it to Bloomberg. Today, you can find it available on many of the pieces of free charting software (such as www.StockCharts.com), and as you have probably gathered, tools like this make the concept of Relative Strength very easy to “see,” all while helping us to get and stay on the right side of the market.
Till next time…
AdamCategories: Adam Koos, CFP®, CMT®, Market Commentary