Surprising conclusions from advanced rotation analysis

Mid-week market update: I have been asked to periodically update my sector leadership analysis as a guide to spot up and coming sector strength. The standard approach is to apply the Relative Rotation Graph (RRG) to the market.

As an explanation, RRG charts are a way of depicting the changes in leadership in different groups, such as sectors, countries or regions, or market factors. The charts are organized into four quadrants. The typical group rotation pattern occurs in a clockwise fashion. Leading groups (top right) deteriorate to weakening groups (bottom right), which then rotates to lagging groups (bottom left), which changes to improving groups (top left), and finally completes the cycle by improving to leading groups (top right) again.

The sector RRG chart shows that Healthcare stocks remain the leading sector. Up and coming sectors are Financial and Industrial stocks, and defensive sector such as Consumer Staples, Utilities, and REITs are starting to lose steam.

However, the recent reclassification of stocks into the newly formed Communication Services sector, which moved high octane names such as Alphabet, Amazon, and Netflix into the sector makes RRG analysis somewhat deceptive. Standard RRG analysis on sectors doesn’t tell the entire story. As an alternative, I present a couple of two other ways of rotation analysis for insights for both leadership and market direction.

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