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
31 PRX 4.635220 4.706384 Leading Leading
28 NPN 4.321966 5.781142 Leading Leading
40 WHL 3.214569 1.346693 Leading Leading
12 CPI 2.128306 0.011263 Leading Lagging
32 REM 1.957463 2.315433 Leading Weakening
36 SLM 1.858688 1.426575 Leading Leading
39 VOD 1.722639 0.933061 Leading Weakening
34 SBK 1.704293 0.525711 Leading Leading
11 CLS 1.433720 1.905672 Leading Weakening
18 GRT 1.277759 3.780467 Leading Weakening
Weakening quadrant
Ticker RS_Current MOM_Current Quadrant_Current Quadrant_Previous
24 MRP 0.988664 0.087408 Weakening Leading
29 NRP 0.688126 10.045627 Weakening Weakening
9 BVT 0.685161 0.819157 Weakening Leading
17 GLN -0.646866 2.471614 Weakening Weakening
22 MCG -0.753330 2.611908 Weakening Weakening
Lagging quadrant
Ticker RS_Current MOM_Current Quadrant_Current Quadrant_Previous
5 APN 0.926965 -6.888901 Lagging Lagging
21 INP 0.700394 -0.062059 Lagging Weakening
25 MTN 0.675627 -7.611135 Lagging Lagging
35 SHP 0.667263 -1.245919 Lagging Lagging
30 OMU 0.537958 -4.484107 Lagging Improving
13 DSY 0.472451 -3.228914 Lagging Lagging
20 INL 0.377632 -2.724667 Lagging Lagging
6 BHG 0.251739 -0.078106 Lagging Lagging
15 FSR -0.163357 -1.197362 Lagging Leading
3 ANG -0.303663 -7.871808 Lagging Weakening
26 NED -1.218992 -2.125426 Lagging Lagging
23 MNP -1.219209 -8.098710 Lagging Lagging
1 AGL -1.707847 -2.438613 Lagging Leading
14 EXX -2.329762 -6.066699 Lagging Lagging
16 GFI -2.342885 -3.788026 Lagging Lagging
19 IMP -3.214657 -3.996455 Lagging Improving
37 SOL -4.056070 -4.861254 Lagging Lagging
38 SSW -4.531417 -32.179985 Lagging Improving
27 NPH -6.527576 -3.894969 Lagging Leading
Improving quadrant
Ranking Share RS MOM
10 CFR 3.847374 -5.107538 Improving Lagging
2 AMS 2.268331 -0.438615 Improving Improving
7 BID 2.036175 -4.762845 Improving Leading
0 ABG 1.605753 -0.435810 Improving Improving
8 BTI 1.572166 -1.836469 Improving Lagging
33 RNI 1.546640 -5.648897 Improving Lagging
4 ANH 1.380332 -1.199491 Improving Improving
Largest Changes in Relative Strength:
Ticker RS_Change MOM_Change
10 CFR 22.398673 -17.850792
31 PRX 19.000277 26.347065
28 NPN 18.083459 8.233286
33 RNI 15.264736 -26.859147
29 NRP 11.903488 42.652940
Largest Changes in Momentum:
Ticker RS_Change MOM_Change
29 NRP 11.903488 42.652940
31 PRX 19.000277 26.347065
18 GRT 7.068152 15.823524
17 GLN -6.010240 14.925120
32 REM 8.105102 9.503940
Changes in Quadrants:
Ticker Quadrant_Change
1 AGL Leading to Lagging
3 ANG Weakening to Lagging
7 BID Leading to Improving
8 BTI Lagging to Improving
9 BVT Leading to Weakening
10 CFR Lagging to Improving
11 CLS Weakening to Leading
12 CPI Lagging to Leading
15 FSR Leading to Lagging
18 GRT Weakening to Leading
19 IMP Improving to Lagging
21 INP Weakening to Lagging
24 MRP Leading to Weakening
27 NPH Leading to Lagging
30 OMU Improving to Lagging
32 REM Weakening to Leading
33 RNI Lagging to Improving
38 SSW Improving to Lagging
39 VOD Weakening to Leading
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