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
3 ANG 2.151227 0.823244 Leading Leading
1 AGL 1.929526 61.535259 Leading Leading
31 PRX 1.638523 1.013547 Leading Leading
28 NPN 1.472515 4.014384 Leading Leading
9 BVT 1.130613 0.131375 Leading Improving
Weakening quadrant
Ticker RS_Current MOM_Current Quadrant_Current Quadrant_Previous
24 MRP 0.975085 1.414445 Weakening Lagging
22 MCG 0.913168 3.805787 Weakening Improving
40 WHL 0.798316 1.087271 Weakening Lagging
15 FSR 0.736299 0.546837 Weakening Weakening
32 REM 0.506854 1.590421 Weakening Weakening
11 CLS 0.457846 2.381187 Weakening Weakening
33 RNI 0.330728 0.465189 Weakening Weakening
39 VOD -0.231135 0.525143 Weakening Weakening
21 INP -0.529405 0.092106 Weakening Weakening
12 CPI -0.540695 0.333058 Weakening Weakening
20 INL -0.550034 0.083525 Weakening Weakening
Lagging quadrant
Ticker RS_Current MOM_Current Quadrant_Current Quadrant_Previous
23 MNP 0.781625 -2.188785 Lagging Lagging
5 APN 0.613086 -5.278255 Lagging Lagging
35 SHP 0.607476 -0.250126 Lagging Lagging
30 OMU 0.556829 -4.158859 Lagging Lagging
4 ANH 0.457510 -2.451760 Lagging Lagging
34 SBK 0.206955 -1.036768 Lagging Lagging
26 NED 0.133704 -0.790223 Lagging Lagging
8 BTI 0.045794 -0.565975 Lagging Lagging
7 BID -0.151979 -0.958629 Lagging Lagging
29 NRP -0.162883 -1.953614 Lagging Lagging
10 CFR -0.210842 -2.130756 Lagging Lagging
25 MTN -0.431875 -10.536848 Lagging Lagging
13 DSY -0.659126 -3.600600 Lagging Weakening
18 GRT -0.753800 -0.903510 Lagging Lagging
Improving quadrant
Ranking Share RS MOM
19 IMP 6.646158 -2.153140 Improving Improving
27 NPH 6.162228 -0.513053 Improving Improving
38 SSW 4.908147 -0.593757 Improving Improving
2 AMS 4.668093 -1.057615 Improving Improving
14 EXX 2.386184 -1.098546 Improving Improving
37 SOL 2.337365 -3.049863 Improving Improving
36 SLM 1.944036 -0.680074 Improving Improving
17 GLN 1.348747 -0.261647 Improving Lagging
6 BHG 1.295898 -1.246139 Improving Lagging
0 ABG 1.216195 -0.386063 Improving Improving
16 GFI 1.162209 -0.858796 Improving Improving
Largest Changes in Relative Strength:
Ticker RS_Change MOM_Change
38 SSW 5.265615 3.402520
19 IMP 4.434836 8.516931
14 EXX 4.293750 -1.812223
27 NPH 3.501111 0.538643
10 CFR 2.967003 1.998684
Largest Changes in Momentum:
Ticker RS_Change MOM_Change
22 MCG -1.905696 22.269139
28 NPN 2.410296 20.363785
19 IMP 4.434836 8.516931
24 MRP 1.147343 8.275337
40 WHL 2.214800 7.487181
Changes in Quadrants:
Ticker Quadrant_Change
6 BHG Lagging to Improving
9 BVT Improving to Leading
13 DSY Weakening to Lagging
17 GLN Lagging to Improving
22 MCG Improving to Weakening
24 MRP Lagging to Weakening
40 WHL Lagging to Weakening
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