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 2.149448 1.181620 Leading Leading
31 PRX 1.963894 1.148811 Leading Leading
28 NPN 1.716066 4.549947 Leading Leading
1 AGL 1.469665 51.490358 Leading Leading
24 MRP 1.273948 0.925259 Leading Leading
15 FSR 1.242025 0.568653 Leading Leading
21 INP 1.194458 0.959779 Leading Weakening
9 BVT 1.144601 0.491718 Leading Leading
7 BID 1.075472 2.711139 Leading Leading
Weakening quadrant
Ticker RS_Current MOM_Current Quadrant_Current Quadrant_Previous
11 CLS 0.814297 1.343044 Weakening Weakening
12 CPI 0.651257 0.047817 Weakening Weakening
3 ANG 0.619957 1.359656 Weakening Weakening
32 REM 0.536587 1.527589 Weakening Weakening
22 MCG 0.062766 4.181087 Weakening Weakening
18 GRT 0.047473 1.028576 Weakening Weakening
29 NRP -0.870255 3.024189 Weakening Weakening
Lagging quadrant
Ticker RS_Current MOM_Current Quadrant_Current Quadrant_Previous
36 SLM 0.967505 -0.318727 Lagging Improving
20 INL 0.933893 -7.914429 Lagging Weakening
10 CFR 0.814588 -1.963244 Lagging Improving
37 SOL 0.746849 -2.312374 Lagging Lagging
13 DSY 0.698530 -2.912985 Lagging Lagging
35 SHP 0.686134 -0.762524 Lagging Lagging
8 BTI 0.659203 -0.169927 Lagging Lagging
26 NED 0.617539 -1.133754 Lagging Lagging
6 BHG 0.490050 -1.096387 Lagging Lagging
14 EXX 0.461636 -1.311756 Lagging Lagging
5 APN 0.351682 -6.543993 Lagging Improving
17 GLN 0.187034 -0.442048 Lagging Lagging
23 MNP -0.317875 -2.674064 Lagging Lagging
33 RNI -1.336117 -0.948107 Lagging Lagging
16 GFI -1.551657 -0.687249 Lagging Lagging
Improving quadrant
Ranking Share RS MOM
2 AMS 4.428617 -0.432434 Improving Improving
19 IMP 2.799110 -1.860218 Improving Improving
38 SSW 2.781759 -0.465858 Improving Improving
27 NPH 2.670256 -0.351443 Improving Improving
4 ANH 1.398881 -1.863212 Improving Improving
0 ABG 1.360110 -0.837860 Improving Improving
34 SBK 1.290331 -0.412433 Improving Improving
25 MTN 1.250113 -7.223072 Improving Improving
30 OMU 1.222739 -4.000665 Improving Improving
39 VOD 1.011264 -0.229860 Improving Weakening
Largest Changes in Relative Strength:
Ticker RS_Change MOM_Change
29 NRP 7.780625 -28.426193
30 OMU 5.638708 1.260480
13 DSY 4.290595 -3.767998
37 SOL 4.269283 4.263005
23 MNP 3.811093 4.064695
Largest Changes in Momentum:
Ticker RS_Change MOM_Change
5 APN -5.962749 35.527624
33 RNI -1.930721 10.983730
25 MTN 1.476791 10.060483
28 NPN 1.610948 7.273760
22 MCG 0.838038 7.256417
Changes in Quadrants:
Ticker Quadrant_Change
5 APN Improving to Lagging
10 CFR Improving to Lagging
20 INL Weakening to Lagging
21 INP Weakening to Leading
36 SLM Improving to Lagging
39 VOD Weakening to Improving
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