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
Ranking Share RS MOM
31 PRX 1.989216 1.780485 28 NPN 1.987541 8.991203 3 ANG 1.669741 0.635597 1 AGL 1.634067 61.227349 9 BVT 1.270931 0.675930 22 MCG 1.050232 1.995395
Weakening quadrant
Ranking Share RS MOM
24 MRP 0.993627 1.556126 40 WHL 0.756118 0.935942 15 FSR 0.732763 0.543269 32 REM 0.527178 1.613012 11 CLS 0.467381 2.392573 33 RNI 0.328885 0.462829 39 VOD -0.347393 0.228411 12 CPI -0.472668 0.536525 20 INL -0.547256 0.085858 21 INP -0.548837 0.070202
Lagging quadrant
Ranking Share RS MOM
23 MNP 0.794391 -2.052272 30 OMU 0.737363 -6.282492 5 APN 0.711807 -4.961647 35 SHP 0.583566 -0.285901 4 ANH 0.360442 -2.497428 34 SBK 0.276666 -0.972769 26 NED 0.202137 -0.686681 8 BTI 0.116690 -0.482104 7 BID 0.003304 -1.768957 29 NRP -0.193423 -2.338079 13 DSY -0.656124 -3.519776 18 GRT -0.753792 -0.903445 25 MTN -0.777245 -14.120425 10 CFR -0.809188 -2.910262
Improving quadrant
Ranking Share RS MOM
19 IMP 6.321010 -2.229302 27 NPH 5.973384 -0.599840 2 AMS 4.454693 -1.123684 38 SSW 4.190876 -0.846865 14 EXX 2.470696 -1.172230 37 SOL 2.252518 -3.097958 36 SLM 1.886299 -0.732398 17 GLN 1.235987 -0.364056 0 ABG 1.174842 -0.423746 6 BHG 1.124316 -1.522305 16 GFI 1.086396 -0.912935
Largest Changes in Relative Strength:
Ticker RS_Change MOM_Change
28 NPN 5.500454 45.247879
14 EXX 4.800822 -2.180644
31 PRX 4.429263 8.898149
30 OMU 3.034212 -28.711982
19 IMP 2.483944 8.136122
Largest Changes in Momentum:
Ticker RS_Change MOM_Change
28 NPN 5.500454 45.247879
22 MCG -1.083313 13.217178
24 MRP 1.258596 8.983739
31 PRX 4.429263 8.898149
19 IMP 2.483944 8.136122
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 Leading
24 MRP Lagging to Weakening
40 WHL Lagging to Weakening
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