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 2.095089 1.507732 Leading Leading
31 PRX 2.093508 1.476934 Leading Leading
28 NPN 1.691459 4.185239 Leading Leading
7 BID 1.629400 3.524903 Leading Lagging
24 MRP 1.531826 1.268632 Leading Leading
15 FSR 1.305572 0.678137 Leading Leading
9 BVT 1.284619 0.525938 Leading Leading
1 AGL 1.122212 61.421289 Leading Leading
Weakening quadrant
Ticker RS_Current MOM_Current Quadrant_Current Quadrant_Previous
3 ANG 0.973782 1.905212 Weakening Weakening
39 VOD 0.863688 0.322046 Weakening Leading
21 INP 0.838048 0.289607 Weakening Weakening
11 CLS 0.667406 2.089265 Weakening Leading
20 INL 0.604637 0.052757 Weakening Weakening
12 CPI 0.552254 0.380457 Weakening Leading
32 REM 0.508611 2.302639 Weakening Weakening
18 GRT -0.003189 1.465160 Weakening Lagging
22 MCG -0.089015 3.779586 Weakening Weakening
29 NRP -1.131730 3.848755 Weakening Lagging
Lagging quadrant
Ticker RS_Current MOM_Current Quadrant_Current Quadrant_Previous
35 SHP 0.744602 -0.683819 Lagging Leading
8 BTI 0.603977 -0.105822 Lagging Lagging
6 BHG 0.556977 -1.124893 Lagging Lagging
26 NED 0.535667 -1.027770 Lagging Lagging
17 GLN 0.452668 -0.165637 Lagging Lagging
13 DSY 0.429853 -3.062189 Lagging Lagging
14 EXX 0.298564 -1.246245 Lagging Lagging
37 SOL -0.134475 -3.258482 Lagging Lagging
33 RNI -0.381180 -1.212927 Lagging Weakening
23 MNP -0.516312 -2.949473 Lagging Lagging
16 GFI -1.625128 -0.837183 Lagging Lagging
Improving quadrant
Ranking Share RS MOM
2 AMS 3.596251 -0.469719 Improving Improving
38 SSW 3.309472 -0.352511 Improving Improving
19 IMP 3.189413 -2.047354 Improving Improving
27 NPH 2.563840 -0.328463 Improving Improving
0 ABG 1.276099 -0.328410 Improving Leading
25 MTN 1.185084 -10.474165 Improving Improving
34 SBK 1.154221 -0.965740 Improving Improving
10 CFR 1.085193 -2.056883 Improving Lagging
30 OMU 1.066528 -4.476614 Improving Improving
36 SLM 1.054632 -0.647019 Improving Improving
4 ANH 1.039155 -2.296191 Improving Lagging
5 APN 1.010104 -7.348306 Improving Weakening
Largest Changes in Relative Strength:
Ticker RS_Change MOM_Change
2 AMS 8.489335 2.084110
7 BID 6.000541 23.319177
25 MTN 5.984286 50.302496
16 GFI 3.856759 3.130613
37 SOL 3.855256 0.142294
Largest Changes in Momentum:
Ticker RS_Change MOM_Change
25 MTN 5.984286 50.302496
29 NRP -6.832024 30.950357
7 BID 6.000541 23.319177
13 DSY -1.218767 19.676570
30 OMU -5.327694 16.243429
Changes in Quadrants:
Ticker Quadrant_Change
0 ABG Leading to Improving
4 ANH Lagging to Improving
5 APN Weakening to Improving
7 BID Lagging to Leading
10 CFR Lagging to Improving
11 CLS Leading to Weakening
12 CPI Leading to Weakening
18 GRT Lagging to Weakening
29 NRP Lagging to Weakening
33 RNI Weakening to Lagging
35 SHP Leading to Lagging
39 VOD Leading to Weakening
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