Compared to last week, let’s see which US 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 US sector indices taking theS&P 500 GICS Level 1 Groups Index and as a time horizon four weeks (backwards from today).
In the last week the sectors of Telecommunications and of Technology remain in the quadrant “on the rise”which includes the sectors with relative strength and momentum greater than the benchmark.
In the last period Nvidia has driven the tech sector, thanks to results and prospects beyond the wildest expectations of the market, strengthening the growth prospects of companies linked to artificial intelligence and counterbalancing the subdued performance of other big names of the so-called Magnificent 7.
I Financial they continue to lose movement speed and remain in the box “weakening”which includes sectors still outperforming over the period under review, albeit with less momentum than the benchmark.
Sharp worsening for the Real Estatefurther and further down among the sectors “down”where the sectors with performance and directionality lower than the reference index are located.
They are also found here Energy, Utilities, Raw material e Discretionary Consumption.
In the end, Industry, Healthcare e Basic necessities they are positioned in the quadrant “improving”which includes macro-sectors with lower performance than the reference index but with greater speed of movement.
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 various American sectors visit the link.
For more detailed information on the tool visit the link.