RRG Chart

S&P 500 Sector Rotation Analysis

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Understanding the Relative Rotation Graph (RRG)

A Visual Guide to Sector Rotation and Market Leadership

The Relative Rotation Graph (RRG) is an advanced charting technique that plots sectors on a coordinate system showing both their relative strength (RS-Ratio) and momentum (RS-Momentum) versus the S&P 500 benchmark. The unique tail-like visualization shows the historical path each sector has traveled, making it easy to identify rotation patterns and predict future movements.

Key Metrics Explained

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RS-Ratio (X-Axis)

Measures relative performance vs. benchmark. Above 100 = outperforming, below 100 = underperforming.

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RS-Momentum (Y-Axis)

Shows the rate of change in relative strength. Above 100 = strengthening, below 100 = weakening.

The Four Quadrants: Your Roadmap to Sector Rotation

Sectors typically rotate clockwise through these quadrants over market cycles

Improving
Top-Left Quadrant

Currently underperforming (RS-Ratio below 100) but showing signs of life with improving momentum (RS-Momentum above 100). These sectors are bottoming and may be preparing to rotate into leading. Early entry opportunities.

Action: Begin accumulation, watch for breakout
Leading
Top-Right Quadrant

These sectors are the market leaders with strong relative strength (RS-Ratio above 100) and positive momentum (RS-Momentum above 100). They're outperforming the benchmark and accelerating higher. This is typically where you want to be invested.

Action: Maintain positions, add on pullbacks
Lagging
Bottom-Left Quadrant

The weakest sectors with both underperformance (RS-Ratio below 100) and negative momentum (RS-Momentum below 100). These sectors are falling behind the market and losing ground. Typically best avoided or used for tactical shorts.

Action: Avoid or reduce to minimum allocation
Weakening
Bottom-Right Quadrant

Still outperforming the market (RS-Ratio above 100), but momentum is slowing (RS-Momentum below 100). These sectors may be topping out and preparing to rotate into lagging. Watch for breakdown signals.

Action: Take profits, reduce exposure
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Reading the Tails

The colored lines show each sector's recent path. Longer tails indicate faster movement. Watch for sectors making sharp turns at quadrant boundaries - these often signal major trend changes.

Why Professional Investors Use RRG

1

Anticipate Market Leadership Changes

See which sectors are rotating in and out of favor before major moves occur

2

Improve Entry & Exit Timing

Time your sector allocation based on position and trajectory, not just price action

3

Enhance Portfolio Diversification

Maintain exposure to different rotation stages for balanced risk/reward

4

Identify Early Opportunities

Spot sectors transitioning from improving to leading before the crowd notices

💡 Pro Tip

Watch for sectors with short tails near quadrant boundaries. These are coiling up for potential explosive moves. The longer a sector stays in improving, the stronger the eventual breakout to leading tends to be.