Compared to last week, let’s see which European sector indices have confirmed their strength and which have slowed down or reversed the trend. To do this, we use the Relative Rotation Graph (RRG), a tool based on methods and algorithms developed by Julius de Kempenaer.
What is sector rotation of indices and how is it represented
Sector rotation represents the variation in capital allocation by investors between different sectors depending on the current economic phase. To analyze this phenomenon you can use the Relative Rotation Graph (RRG), a graph divided into four quadrants that represents the trends of relative strength e di momentum of the various equity sectors compared to a benchmark, in a given time horizon.
In more detail, the RRG uses four quadrants to define the four phases of a relative trend: “weakening”, “falling”, “improving” and “rising”. The real power of this tool lies precisely in its ability to plot relative performances on a single overall graph and highlight the sector rotationsor the gradual passages of the sector indices from one quadrant to another.
The performance of the sector indices in the week to date
In this case we analyzed the performance of the European sector indices taking lo as the reference benchmark Stoxx Europe 600 and as a time horizon four weeks (backwards from today).
Sectors on the rise
The “rising” quadrant contains the sectors that outperform the reference index in the period under review, with a higher speed of movement.
Here we find Technology, Travel and Leisure, Industry, Automotive and Personal Carein line with the previous week, which is also joined by the Banksalbeit with similar relative strength and momentum to the benchmark.
These are mainly cyclical sectors, in a context of market risk appetite which rewards the sectors most linked to the performance of the economy.
Sector indices in transition
The box below (“weakening”), includes funds with relative strength still higher than the benchmark but lower momentum.
Here they are Financial Services and Constructionin addition to Mediaworsening from the top panel.
In the box “improvement”that of the sectors with a speed of movement higher than the benchmark but less relative strength, only theHealthcare.
The Insurance they move substantially in line with the benchmark.
The worst sectors
There is a large array of sectors “down”, i.e. characterized by relative strength and momentum lower than the reference index. These sectors therefore underperform the benchmark over the period under review and show a slower speed of movement than it.
Among them are found Real Estate, Chemicals, Retail, Telecommunications, Utilities, Raw Materials, Consumer Goods, Energy and Food & Beverage.
They are mostly countercyclical sectors, which tend to perform less than the market in expansionary phases. The prospect of fewer rate cuts is also weighing on some sectors with a high debt component, such as public services, compared to the strong easing bets of a few weeks ago.
How to interpret the Relative Rotation Graph in more detail
To correctly read the RRG you must fully understand the meaning of the two main inputs underlying the tool: JdK RS-Ratio and JdK RS-Momentum. The JdK RS-Ratio, present on the horizontal axis, is in fact an indicator of relative strength and tells us whether the sector index in question, for example the STOXX Europe 600 Banks, is outperforming or underperforming the benchmark, in this case it STOXX Europe 600. A JdK RS-Ratio equal to 100 in fact implies a movement of the sector that can be overridden by that of the benchmark, therefore with little added value. A JdK RS-Ratio higher than 100 implies greater relative strength, while lower than 100 lower relative strength.
Il JdK RS-Momentum instead it is a momentum indicator and tells us how quickly this movement of over- or underperformance of the sector on the benchmark occurs. Also in this case JdK RS-Momentum equal to 100 tells us that the sector has developed a trend strength equal to that of the benchmark. A JdK RS-Momentum lower than 100 indicates a less directional (fast) movement, while if it is higher than 100 it is the opposite.
Therefore, the Relative Rotation Graph generates four quadrants. The strongest stocks are located at the top right (quadrant “On the rise”) and are the leading sectors in that market situation. Those in the lower right quadrant, “Weakening“, they are outperforming but have slowed down compared to the benchmark and therefore are at risk of underperformance, i.e. of entering the ” quadrantDown”. In fact, if the pace of performance decreases further, the sector will begin to underperform, ending up in the lower left quadrant. From here, if the sectors begin to recover momentum by moving more strongly than the benchmark they will move into the “ quadrantImprovement” and are a candidate to return to the “Up” category as soon as they start to outperform the benchmark again.
To find information on the different European sectors visit the link.
For more detailed information on the tool visit the link.