5 week SPDR Sector Rotation Study

Understanding Sector Rotation
Most traders are familiar with the concept of Sector Rotation. Its the idea that money is constantly flowing into and out of different sectors within the market. Over time, sectors will rotate leadership position in relation to other sectors.  It’s always best if you can stay in the strongest parts of the market. Knowing about the concept of Sector Rotation is one thing; Being able to understand the rotation then do something about it is another.
A tool I use to understand and visualize the Sector Rotation process is a Relative Rotation Graph. (RRG ). An RRG is just what it says…..a graph that displays the rotation of a collection of securities over time measured against a benchmark.
For an in-depth treatment of RRG’s readers can visit this page.   RRG’s Explained  RRG are available for members of the Stockcharts.com platform. Even non-members are welcomed to use the tool, although members do have the ability to access additional functionality.

You can find and use the RRG Charts on the FREE TOOLS page within Stockcharts    HERE

5 Week Sector Rotation – Where is the Strength?
he RRG below shows the relative rotation of the SPDR Sectors over the past 5 weeks.  The tail on each Sector denotes the path of the sector over the past 5 weeks. A long tail means the sector is moving quickly. The data table below the graph illustrate the data behind the graph.

The RRG shows us that Energy ( XLE ) is strong in the leading quadrant along with Tech ( XLK ). Cyclicals ( XLY ) have weakened a little, while XLI, XLF, & XLP are clearly lagging.  We can see that Materials ( XLB ) have migrated from lagging to improving.  By seeing this rotation I am better able to direct my “long” search efforts toward sectors that are either improving or leading.

It’s important to understand that the RRG is all about RELATIVE MOVEMENT both to itself and whatever benchmark you choose.  So for example, just because a sector is in the “lagging” quadrant doesn’t mean the sector is necessarily going down. It simply means that in comparison to the other securities, it is not as strong and likely weakening.

Another general characteristic of the RRG is that the movement flows in a clockwise manner.  Leading > Weakening > Lagging > Improving > Leading     Not always the case but over a longer snapshot you often see that kind of rotation.

I encourage readers to explore Relative Rotation Graphs. It can be a powerful way to visualize the rotations / relative strength of whatever data set you are interested in.

Good Luck, Hope it Helps


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