When managing sector rotation strategies, Relative Rotation Graphs (RRG) will provide the perspective you need. Understanding RRG can help to improve your sector rotation decisions.
Back when I was working on the sell-side trading floor of an investment bank, relative strength wasn’t just another metric; it was the metric. Institutional portfolio managers often don’t have the luxury to sit on large cash positions; they need to stay fully invested and beat the benchmark, usually the S&P 500. If the market drops 10% and your portfolio “only” drops 5%, you’re a hero. You still lost 5% but you’ve outperformed the benchmark by 5%. That’s the name of the game.
This is where the ability to identify sectors that are going down less or up more than the benchmark becomes crucial. You want to know not only when to rotate, but also where to rotate into.
This is how Relative Rotation Graphs (RRGs) came to life.
By utilizing RRG, investors can better navigate the complexities of sector performance.
RRGs allow you to visualize the relative trends of multiple securities (or sectors, or asset classes) against a common benchmark, and each other. Securities are plotted as dots that move over time through four quadrants:
Connecting the observations over time shows the signature “tail” that reveals how a security rotates through phases of leadership and weakness.
Sector leadership is dynamic. What works this quarter might underperform next. Macro conditions like inflation, rates, and economic cycles certainly play a role, but so do sentiment shifts and capital flows.
To stay ahead of these changes, you need a process. RRGs provide a structured visual overview of sector movements, showing not only their current positions but also their future direction.
The most popular universe for sector rotation is the 11 SPDR sector ETFs (XLY, XLK, XLF, etc.) against the S&P 500 (SPY). This setup gives a clear, visual representation of sector leadership within the US equity market.
It’s tempting to focus only on which quadrant a sector is in. But what really matters is trajectory. A sector moving from Improving into Leading with a strong RRG-Heading (0–90 degrees) usually signals emerging leadership.
Conversely, a sector rotating from Leading to Weakening with a heading between 180–270 degrees is losing steam, even if it’s still “outperforming” for now.
The length and curvature of the tails also matter. Long tails suggest rapid changes in relative momentum; short tails often indicate trend stability.
The tail length in the RRG above is five weeks. Note the difference between XLE, with a very long tail, and XLV, with a very short tail. It’s easy to grasp the difference in power between the two moves.
Just like price charts, relative strength operates on multiple timeframes. Weekly RRGs are great for long-term trends, while daily RRGs help spot shorter-term shifts.
Sometimes, a sector may be weakening on the daily chart but still leading on the weekly. That might be a temporary pause, not yet a full rotation. Watching both helps reduce noise and avoid premature decisions.
The top RRG shows the weekly rotation for XLK, XLI, XLC, and XLE. The bottom RRG shows the rotation for the same sectors on a daily time frame. Note how the XLI tails are almost similar on both time frames while XLC’s tails are almost opposite.
RRGs aren’t just for equity sectors. You can chart asset classes like stocks, bonds, commodities, and real estate against a balanced benchmark (such as VBINX, a 60/40 stock-bond fund).
This gives you a broader, top-down view of whether markets are leaning risk-on or risk-off—and helps connect sector performance to macro themes.
Relative Rotation Graphs provide a powerful lens for visualizing relative performance across multiple securities. In the context of sector rotation, they are an essential tool for identifying leadership early and avoiding the laggards.
If you’re managing sector exposure and want a reliable, visual way to anticipate change, RRGs offer a clear advantage. They distill complex rotational dynamics into a single, intuitive chart, helping you stay ahead of the market and make smarter, more confident allocation decisions.
RRGs show you the BIG picture—in ONE picture.