Let me preface this piece with a warning: This isn’t a broad market replace, an earnings season information regurgitation, or a Federal Reserve assembly autopsy. It’s meant to be a glance below the hood at how we handle our mannequin portfolios. As Daniel Ocean mentioned, “If that doesn’t sound like your explicit model of vodka, protected journey (till subsequent submit!) and no exhausting emotions!” 


Relative Rotation Graphs, or RRGs, are an amazing device that our group makes use of to evaluate the relative power of particular person shares, sectors and asset courses.

As we’ve written earlier than, relative power is an investing idea that has been closely researched and is among the major refutations of the Environment friendly Market Speculation. In case you needed to distill relative power right down to a tagline, it’s this: do extra of what’s working, and fewer of what’s not.

However simply studying about relative power could cause glazed eyes in even the steeliest of funding professionals.

With RRGs, we’re capable of visually dissect these relationships in a short time, and over any timeframe of our selecting.

To assemble an RRG, an asset is “comped” (in contrast) in opposition to a benchmark and is classed into one in every of 4 classes, or quadrants, based mostly on the relative power relationship and—this is essential—the momentum of that relationship. Moreover: the additional away from the origin (useless middle) of the RRG plot, the stronger the connection (i.e. you would possibly lag by a bit or lead by quite a bit).

As you learn on, keep in mind that relative power, by definition, doesn’t suggest something about absolute funding efficiency. If inventory A goes down 20% in a month and inventory B goes down 10%, the latter is alleged to have optimistic relative power, though absolute efficiency is detrimental.

  • BLUE: Bettering (Detrimental relative power, with optimistic relative power momentum);
  • GREEN: Main (Optimistic relative power, with optimistic relative power momentum);
  • YELLOW: Weakening (Optimistic relative power, with detrimental relative power momentum);
  • RED: Lagging (Detrimental relative power, with detrimental relative power momentum);

As information factors are accrued and plotted (day by day, weekly, month-to-month, yearly relative returns), you’ll be able to see how relationships transfer over time. Additional, these relative power calculations needn’t be considered as static information factors. We are able to additionally view the trajectory of an asset, and thru some primary visible rendering, we will additionally witness its evolution by time. The timeframe chosen will drastically affect the visible rendering of the connection. That means, the motion of an asset will look very completely different utilizing a day by day timeframe versus a yearly timeframe. A day dealer would use this device very otherwise than a place dealer. (Clearly, you’d classify Monument into the latter.) 

In case you take a look at sufficient of those interactive plots – particularly with particular person S&P sectors on shorter (day by day) time frames – you’ll discover that they have an inclination to maneuver in a clockwise method by the varied quadrants. Although there are at all times exceptions. A meteorological comparability could be the trail of thunderstorms within the Midwest. Rising up, I at all times anticipated storms in Tulsa to method us from southwest to northeast. However we at all times knew that storms would possibly hit us from the northwest, and on a uncommon event, we would get them from a totally surprising course (the uncommon southeast to northwest path).

Bringing it again into funding parlance, you would possibly argue that RRGs visually plot cycles, that are at all times and in all places current over a number of time frames. I’ve really simply laid out the bottom case for why lecturers and practitioners are so curious about cycle idea: they’re pervasive in each nature and in markets. In case you actually need to get “wonkish,” take a look at Fibonacci retracement.

In the long run, I actually benefit from the RRG device as a result of it’s one other approach to visually synthesize and examine elements of different mannequin portfolios we use at Monument. Particularly, our Versatile Asset Allocation (FAA) technique, which is closely reliant on stock-to-bond relative power, and our Core ETF mannequin, which employs a sector rotation sleeve.

Let’s hit on the Versatile Asset Allocation (FAA) angle first.

The animation beneath illustrates the relative power of world shares (as represented by the $ACWI ETF) to the bond market (as represented by the $AGG ETF). We’re taking a look at weekly relative returns, going again over the past 12 months, with the RRG tail representing the final ten information factors. You’ll be able to clearly see world shares very clearly residing within the pink Lagging quadrant as we hovered close to the lows in October of 2022, however very decisively altering trajectory close to the flip of the 12 months. We’ve spent most of 2023 with shares residing within the Bettering and Main quadrants, with some early-year zig zagging between the Main and Weakening zones.

As a reminder, this doesn’t essentially say something explicitly about absolute returns, solely how shares are performing compared to bonds.

This more-or-less matches with the relative power information within the Versatile Asset Allocation mannequin, which seems to be at a longer-term transferring common of the stock-to-bond relative power relationship. The $ACWI RRG plot would possibly presently sit (albeit shallowly) within the Weakening quadrant, however the period of time spent within the Main quadrant, in addition to the magnitude of the relative power relationship whereas residing in that zone, presently mimics our risk-on FAA sign. The place we go for the upcoming October rebalance is anyone’s guess, however until we see a big trajectory shift between now and the top of the month (bonds considerably outperforming shares), I’d wager we keep the course with the present sign.

stock-to-bond relative strength relationship

Now, let’s check out Core ETF

Now, let’s view this by the lens of the Core ETF Mannequin, which makes use of a “dynamic” sector rotation sleeve to enrich the low value “buy-and-hold” core.

What we’re taking a look at beneath are the 11 S&P 500 sectors, in contrast to not bonds as within the earlier instance, however to cap-weighted S&P 500. That is the place I’d say this piece is related for passive traders holding a broad-based S&P 500 fund. You would possibly know the market is up or down, however have you learnt why? Which pistons are presently transferring the automotive ahead or not less than conserving it in gear?

S&P 500 sectors, compared to cap-weighted S&P 500.

Some observations from the sector rotation RRG embrace the next:

  • The prolonged, demonstrable power of each Know-how ($XLK) and Communications ($XLC), which actually picked up steam coincident with the regional banking disaster in February of this 12 months. That is what has induced some to invest that Tech has grow to be a de facto “flight to security” sector.
  • As we all know, Know-how is a big part within the cap-weighted S&P 500, so any power in that sector will enlarge the returns of the group.
  • The newer emergence of Vitality ($XLE) since July/August, which not too long ago displaced Shopper Staples ($XLP) in our sector rotation sleeve of the Core ETF Mannequin.
  • Taking a look at different particular person inventory fashions we handle, the Vitality theme has been pervasive, paving the best way for some current entrants into each the Dividend ($PSX, Phillips 66) and Development ($APA, APA Corp) fashions.

We hope this submit was instructive. You probably have any questions, please be happy to achieve out. In any other case, have an exquisite weekend.

~ Erin

*In case you’re curious about studying extra about RRGs, take a look at this hyperlink.
*We entry RRGs by Optuma.

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