[RRG] Will S&P 500 Sectors (XLK, XLY, XLF) Create Another Solid Gains This Week?

Last week we saw the market ended with solid gains on Friday (16 Aug) with the S&P 500 index closed with +3.93%.

The significant gain by S&P 500 index was helped by some of the high performing sectors, though all 11 of the S&P 500 sectors close in the positive zone.

In this article I would like to share how I would be using relative rotation graph (RRG) to see if the same sectors would continue to do well this week (19-23 August) against the benchmark (S&P 500).

Relative Rotation Graph (RRG) is a visual tool used in technical analysis to compare the performance of multiple assets (like stocks, sectors, or indices) against a benchmark and each other over time. The graph plots these assets on a two-dimensional plane, where the X-axis typically represents relative strength (RS) and the Y-axis represents relative momentum (RM).

In an RRG, assets move through four quadrants:

Leading: High RS and high RM, indicating strong performance.

Weakening: High RS but decreasing RM, suggesting a potential decline in performance.

Lagging: Low RS and low RM, showing underperformance.

Improving: Low RS but increasing RM, indicating a potential recovery.

By observing the rotation of assets through these quadrants, we as investors can identify trends, make comparisons, and potentially forecast future performance relative to the benchmark.

As technology sector (XLK) has done better than the S&P 500 by almost 100%, so this would be of my interest to look at it, similarly, the consumer discretionary sector (XLY) has also surpassed the S&P 500 index weekly gain.

Hence, we will take a look at the chart below, XLK is expected to be in a leading position this week, so we can expect XLK to do better than the S&P 500 index, whereas XLY would be in improving, this suggest that they have a potential.

So what can this tell us, I would think technology stocks could be making some rally and some of the consumer discretionary stocks could also be performing.

We are also expecting earnings this week from stocks from the XLK and XLY sectors. With TJX Companies Inc (TJX) holding 3.48% in the XLY sector SPDR index weight, this is one of the stock we can watch closely.

There are some tech stocks like Analog Devices, Inc.(ADI) and Synopsys, Inc. (SNPS) reporting their earnings though their weightage is not significant but I believe it could make an impact to the sector movement.

If we looked at the financials (XLF) though it is in the leading quadrant, i would look at it as not as strong as technology (XLK), so I might not be putting so much focus on the financials institutions given that Fed Chairman Jerome Powell met with CEOs of major U.S. banks, including JPMorgan Chase (JPM), Citigroup (C), Bank of America (BAC), and Morgan Stanley (MS), to discuss proposals for increasing bank capital requirements.

The meeting aimed to get the banks' cooperation on the Basel III endgame proposal, which could see a 16% rise in capital requirements. This may cause some of the banks to adjust their capitals hence affecting the stock price.

For materials (XLB), though it is in the improving quadrant indicating potential recovery, we might not see significant signal for any improvement this week. There is no stocks in this sector reporting earnings this week as well.

We have stocks from these 2 stocks reporting earnings this week, so we might see some movement from Nordson Corporation (NDSN) from XLI helping to make potential recovery to the leading quadrant.

As for XLV, we have Agilent Technologies, Inc. (A) reporting its result on 21 Aug, and the earnings might make some impact on the Sector SPDR Index Weight.

We need to understand that Relative Rotation Graph (RRG) is a tool used in technical analysis to visualize and compare the relative strength and momentum of multiple securities (such as stocks, sectors, or indices) relative to a benchmark and to each other.

One of the way I would be using is to use RRG to optimize my portfolio by identifying which assets to hold, overweight, or underweight based on their relative performance.We can also use it to spot trends and potential opportunities based on the movement of securities from one quadrant to another.

Appreciate if you could share your thoughts in the comment section whether you think Relative Rotation Graph (RRG) can help you in optimising your portfolio and also help to spot trend on top of the technical analysis tools one might already be using.

Disclaimer: The analysis and result presented does not recommend or suggest any investing in the said stock. This is purely for Analysis.