Introduction
In the world of equity market analysis, traders and investors often seek to identify promising investment opportunities by evaluating the performance of various shares. One valuable tool that aids in this analysis is the Relative Rotational Graph (RRG). RRG is a graphical representation that helps investors understand the relative strength and momentum of different shares within a given market or sector.
What is a Relative Rotational Graph (RRG)?
A Relative Rotational Graph is a visual representation of the relative performance of shares in comparison to a benchmark index or a specific group of shares. The graph plots individual shares as data points and illustrates their movement over time, relative to the benchmark. The positioning of each share on the graph provides crucial insights into its relative strength, momentum, and potential investment opportunities.
How RRG Works: The Four Quadrants
The RRG chart is divided into four quadrants, each representing different stages of relative performance:
Leading (Leading Quadrant): Shares in this quadrant are exhibiting strong relative strength and positive momentum compared to the benchmark. They are outperforming the broader market or sector and are considered leaders in terms of price performance. These shares are regarded as potential Profit takes or Holds candidates.
Weakening (Weakening Quadrant): Shares in this quadrant are experiencing a decline in relative strength compared to the benchmark. While they might still be in an uptrend, their momentum is slowing down, and they may be losing some of their leadership positions. These shares are classified as potential Deteriorating candidates or short-selling.
Lagging (Lagging Quadrant): Shares in this quadrant are underperforming the benchmark. They are experiencing weak relative strength and may be struggling compared to other shares or the broader market. These shares are classified as potential Avoid candidates.
Improving (Improving Quadrant): Shares in this quadrant are showing signs of improvement in relative strength, indicating that they are gaining momentum and starting to outperform the benchmark. These shares are considered as potential Buy candidates.
Interpreting RRG for Investment Insights
When analysing a Relative Rotational Graph, traders and investors can draw several meaningful conclusions:
Identifying Leaders and Laggards: RRG helps investors quickly identify which shares are leading the market's upward trends and which are lagging behind. Leading shares in the Leading Quadrant might be attractive investment candidates, while those in the Lagging Quadrant could warrant closer examination to understand potential weaknesses.
Spotting Trend Reversals: A changing position of a share on the RRG can signal a potential trend reversal. For example, a share moving from the Weakening Quadrant to the Improving Quadrant may indicate a shift in momentum and an upcoming upward trend.
Diversification Insights: RRG can assist in portfolio diversification by highlighting shares that exhibit a low correlation with the benchmark. Adding shares with diverse movement patterns can help reduce overall portfolio risk.
Monitoring Sector Rotations: RRG is especially useful for sector rotation strategies, where investors rotate their investments based on the relative strength of sectors. It helps identify which sectors are currently leading or lagging in the market.
Limitations of RRG
While RRG is a valuable tool, it is essential to recognize its limitations:
Historical Performance: RRG is based on past price data and may not always predict future movements accurately.
Not a Standalone Indicator: RRG should be used in conjunction with other technical and fundamental analysis tools for comprehensive decision-making.
Volatility Impact: Highly volatile shares may exhibit erratic movements on the RRG, making interpretation challenging.
Conclusion
Relative Rotational Graphs provide traders and investors with a powerful visual representation of the relative performance of shares compared to a benchmark index or a group of shares. By understanding the quadrants and interpreting the movements of individual shares, investors can gain valuable insights into market trends, identify potential investment opportunities, and optimise their portfolio allocations. As with any investment analysis tool, it should be used alongside other methods and within the context of a well-thought-out investment strategy.
Top 40 Share constituent RRG chart:
The output displayed below compares the individual constituents of the JSE Top 40 index against the index itself. This output undergoes daily updates, and to enhance clarity, various colour backgrounds are utilised for ease of reference.
Leading (Leading Quadrant): Green background. These shares are regarded as potential Profit takes or Hold candidates.
Weakening (Weakening Quadrant): Yellow background. These shares are classified as potential Deteriorating candidates or short-selling.
Lagging (Lagging Quadrant): Red background. These shares are classified as potential Avoid candidates.
Improving (Improving Quadrant): Blue background. These shares are considered potential Buy candidates.
Assign ranking numbers to each share based on the overall RRG strength. The ranking of each share within a quadrant reflects the top selections.
Leading quadrant
Ticker RS_Current MOM_Current Quadrant_Current Quadrant_Previous
40 WHL 4.337230 1.717703 Leading Leading
34 SBK 4.109568 2.289520 Leading Leading
28 NPN 3.979236 5.497766 Leading Leading
24 MRP 3.954841 2.333622 Leading Leading
0 ABG 3.897320 1.806114 Leading Improving
31 PRX 3.897289 3.543514 Leading Leading
12 CPI 3.670718 0.957242 Leading Lagging
11 CLS 3.328279 3.425957 Leading Weakening
32 REM 3.278516 3.429020 Leading Weakening
36 SLM 3.152289 2.744499 Leading Leading
35 SHP 3.073760 0.273121 Leading Lagging
15 FSR 2.747305 0.984329 Leading Leading
18 GRT 2.598653 6.966062 Leading Weakening
21 INP 2.580581 2.375701 Leading Weakening
9 BVT 2.461295 2.219974 Leading Leading
20 INL 2.130789 0.190298 Leading Lagging
39 VOD 1.982006 1.204765 Leading Weakening
Weakening quadrant
Ticker RS_Current MOM_Current Quadrant_Current Quadrant_Previous
7 BID 0.866618 5.231913 Weakening Leading
8 BTI -0.127675 0.259722 Weakening Lagging
22 MCG -0.183295 3.431824 Weakening Weakening
29 NRP -0.233376 6.287310 Weakening Weakening
17 GLN -2.380286 7.070451 Weakening Weakening
6 BHG -2.596632 8.117066 Weakening Lagging
Lagging quadrant
Ticker RS_Current MOM_Current Quadrant_Current Quadrant_Previous
25 MTN 0.349105 -7.867995 Lagging Lagging
4 ANH -0.479315 -4.095899 Lagging Improving
23 MNP -0.549040 -5.055716 Lagging Lagging
2 AMS -1.351263 -1.329076 Lagging Improving
1 AGL -2.196067 -2.939005 Lagging Leading
3 ANG -2.876579 -37.333805 Lagging Weakening
14 EXX -3.463950 -7.723676 Lagging Lagging
19 IMP -4.737839 -4.614971 Lagging Improving
16 GFI -5.435639 -16.082659 Lagging Lagging
38 SSW -5.979055 -38.841775 Lagging Improving
37 SOL -6.477772 -6.442219 Lagging Lagging
27 NPH -7.398311 -4.269047 Lagging Leading
Improving quadrant
Ranking Share RS MOM
13 DSY 3.631652 -1.521517 Improving Lagging
30 OMU 2.844866 -3.363853 Improving Improving
10 CFR 1.990368 -3.216396 Improving Lagging
33 RNI 1.885780 -6.368233 Improving Lagging
5 APN 1.583244 -7.792305 Improving Lagging
26 NED 1.426886 -0.186696 Improving Lagging
Largest Changes in Relative Strength:
Ticker RS_Change MOM_Change
12 CPI 19.311773 12.092147
13 DSY 19.299970 11.030851
0 ABG 18.520591 18.056623
34 SBK 18.426577 10.049380
33 RNI 17.638719 -31.175164
Largest Changes in Momentum:
Ticker RS_Change MOM_Change
6 BHG -20.292654 51.255622
17 GLN -18.144176 42.518144
18 GRT 16.314406 34.937096
20 INL 10.176378 26.777910
29 NRP 5.452971 20.103041
Changes in Quadrants:
Ticker Quadrant_Change
0 ABG Improving to Leading
1 AGL Leading to Lagging
2 AMS Improving to Lagging
3 ANG Weakening to Lagging
4 ANH Improving to Lagging
5 APN Lagging to Improving
6 BHG Lagging to Weakening
7 BID Leading to Weakening
8 BTI Lagging to Weakening
10 CFR Lagging to Improving
11 CLS Weakening to Leading
12 CPI Lagging to Leading
13 DSY Lagging to Improving
18 GRT Weakening to Leading
19 IMP Improving to Lagging
20 INL Lagging to Leading
21 INP Weakening to Leading
26 NED Lagging to Improving
27 NPH Leading to Lagging
32 REM Weakening to Leading
33 RNI Lagging to Improving
35 SHP Lagging to Leading
38 SSW Improving to Lagging
39 VOD Weakening to Leading