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  • Writer's picturePeet Serfontein

Understanding Relative Rotational Graph (RRG) in Share Trading

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:

  1. 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.

  2. 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.

  3. 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.

  4. 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:

  1. 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.

  2. 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.

  3. 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.

  4. 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:

  1. Historical Performance: RRG is based on past price data and may not always predict future movements accurately.

  2. Not a Standalone Indicator: RRG should be used in conjunction with other technical and fundamental analysis tools for comprehensive decision-making.

  3. 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.

  1. Leading (Leading Quadrant): Green background. These shares are regarded as potential Profit takes or Hold candidates.

  2. Weakening (Weakening Quadrant): Yellow background. These shares are classified as potential Deteriorating candidates or short-selling.

  3. Lagging (Lagging Quadrant): Red background. These shares are classified as potential Avoid candidates.

  4. 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 2.287732 1.232404 Leading Leading

1 AGL 1.685958 51.095805 Leading Leading

28 NPN 1.397969 3.241171 Leading Leading

31 PRX 1.304103 0.637219 Leading Leading


Weakening quadrant

Ticker RS_Current MOM_Current Quadrant_Current Quadrant_Previous

22 MCG 0.883624 2.945857 Weakening Weakening

15 FSR 0.774521 0.388200 Weakening Weakening

24 MRP 0.743380 0.929387 Weakening Weakening

33 RNI 0.682091 1.091101 Weakening Weakening

40 WHL 0.272907 0.551143 Weakening Weakening

11 CLS 0.174675 1.469670 Weakening Weakening

39 VOD -0.181220 0.296013 Weakening Weakening

20 INL -0.354722 0.331025 Weakening Weakening

18 GRT -0.828952 0.202735 Weakening Lagging


Lagging quadrant

Ticker RS_Current MOM_Current Quadrant_Current Quadrant_Previous

23 MNP 0.875134 -1.635338 Lagging Lagging

9 BVT 0.835796 -0.228433 Lagging Leading

32 REM 0.779830 -1.264714 Lagging Weakening

35 SHP 0.502238 -0.400962 Lagging Lagging

34 SBK 0.326062 -0.919846 Lagging Lagging

4 ANH 0.282739 -2.258265 Lagging Lagging

26 NED 0.276008 -0.702126 Lagging Lagging

30 OMU 0.209120 -3.801586 Lagging Lagging

29 NRP 0.208613 -3.419708 Lagging Lagging

8 BTI 0.184091 -0.419751 Lagging Lagging

7 BID -0.124673 -0.942593 Lagging Lagging

12 CPI -0.129415 -1.072954 Lagging Lagging

10 CFR -0.296004 -1.976888 Lagging Lagging

13 DSY -0.402296 -3.416472 Lagging Lagging

21 INP -0.407926 -0.010200 Lagging Weakening

25 MTN -0.643258 -8.892640 Lagging Lagging


Improving quadrant

Ranking   Share RS MOM

19 IMP 6.153635 -1.905176 Improving Improving

27 NPH 5.490248 -0.554445 Improving Improving

38 SSW 4.261679 -0.654101 Improving Improving

2 AMS 3.818150 -1.101303 Improving Improving

14 EXX 2.399376 -0.940528 Improving Improving

37 SOL 2.130480 -2.779134 Improving Improving

36 SLM 1.868586 -0.649892 Improving Improving

16 GFI 1.830273 -1.080830 Improving Improving

17 GLN 1.443811 -0.280464 Improving Improving

6 BHG 1.415307 -1.080708 Improving Improving

0 ABG 1.200252 -0.291856 Improving Improving

5 APN 1.012136 -13.463572 Improving Lagging


Largest Changes in Relative Strength:

Ticker RS_Change MOM_Change

16 GFI 10.740986 1.726335

12 CPI 4.109907 -2.687214

25 MTN 3.909233 50.658986

5 APN 3.470240 -53.219637

37 SOL 2.978918 0.561644


Largest Changes in Momentum:

Ticker RS_Change MOM_Change

25 MTN 3.909233 50.658986

30 OMU -3.726128 17.109613

13 DSY 1.899922 15.579699

18 GRT -1.089803 8.131273

33 RNI 2.255801 4.650414


Changes in Quadrants:

Ticker Quadrant_Change

5 APN Lagging to Improving

9 BVT Leading to Lagging

18 GRT Lagging to Weakening

21 INP Weakening to Lagging

32 REM Weakening to Lagging






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