When the markets get choppy or begin to consolidate, it’s a good idea to understand what’s happening under the surface. Market breadth indicators (like %stocks above their 50 day moving average) are one way to assess internals, but another way is by looking at sector rotation. By examining sector ETFs to see which are leading and lagging, we can figure out where the smart money is going.
One tool that is good for this type of analysis is Relative Rotation Charts (RRG). RRG charts were developed by Julius de Kempenaer (@RRGresearch) and are a fantastic way to measure a basket of securities or indexes against a specific benchmark. RRG charts show both relative strength and momentum of the selected basket compared to the benchmark chosen.
The chart I have highlighted below uses a basket of S&P 500 Sector ETFs benchmarked to the S&P 500 Index (SPX), which falls in the middle of the four quadrants. As you can see, there are leading, weakening, lagging, and improving quadrants. As investors we want to be in assets that are leading our chosen benchmark and avoid weakening and lagging assets. One of the many benefits of RRG charts is we can look at what assets are improving to give clues as to which sectors may are becoming more attractive (so we can be opportunistic).
Looking at the chart we can see how each sector ETF is currently performing, while getting an idea of which Sector ETFs to pay attention to (put on our radar). Healthcare (XLV) and Financials (XLF) are leading (although Financials on watch). But the sector that looks most interesting to me is the Utilities (XLU). Since February, XLU has suffered a selloff of over 13% peak to trough. The last two weeks have seen some encouraging price action after making a low of 42.67. As of this writing XLU still has work to do, but the RRG chart is offering insight that this is sector which is improving with potential of becoming a leader once again. Time will tell and so will the charts.
RGG Sector ETF Rotation Chart
Thanks for reading.
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No position in any of the mentioned securities at the time of publication. Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.