Relative Rotation Graph

1. Platforms
   • Relative Strength Scatter Plot [LuxAlgo] — Indicator by LuxAlgo — TradingView
   • https://web.strike.money/rrg

2. Think of each index on the RRG as a car in a race. The further an index is from the center, the stronger its performance (relative to a benchmark). The big cars (indices) far away are leading the race—they’re in a strong trend and they don’t change direction quickly. The smaller cars closer to the center are in transition—they’re either losing momentum or building it up, which is why they can change direction more quickly. It’s not about the number of stocks or the market cap; it’s about their relative performance and speed.

• In the image, the size difference and the positioning of the highlighted indices, such as Nifty CPSE and others close to the center, reflect these variations. The distance also indicates their stability; indices further from the center (like those in the leading quadrant) tend to be more stable in maintaining trends, while indices near the center may exhibit more rapid changes in trend or momentum.

3. While most of the time you’ll see indices moving in a clockwise direction—kind of like the natural rhythm of cycles—there can be situations where the movement is counterclockwise. This often happens when there’s a sudden shift in market conditions, like a strong policy change or an unexpected economic event. It’s like a car suddenly taking a sharp turn against the usual flow.

4. RRGs are particularly handy for momentum and swing traders since they focus on relative performance. You can see which sectors are getting stronger and make short-term moves. However, long-term investors can also use this tool. For them, if an index is in the “lagging” or “weakening” quadrant, it might mean the sector is undervalued and could be a good time to start accumulating those stocks—kind of like buying something when it’s on sale.

5. The movement of indices on the RRG is influenced by several factors, each of which impacts the way sectors rotate through the four quadrants:

• Macroeconomic Factors:

  • Interest Rates: If interest rates rise, sectors like banks (financials) may move towards the “Leading” quadrant as higher rates improve profitability. Meanwhile, sectors sensitive to borrowing costs, like real estate, might shift towards “Lagging.”
  • Economic Growth Data: Strong GDP growth can push consumer discretionary and industrials towards the “Improving” or “Leading” quadrant, as economic optimism generally boosts these sectors.

Government Policies:

• Regulatory Changes: For instance, new government incentives for renewable energy could push energy-related sectors into the “Improving” or “Leading” quadrant as investors flock to benefit from favorable policies.
• Tax Reforms: A tax cut can make sectors like FMCG (Fast-Moving Consumer Goods) more attractive, increasing their momentum, thus moving them to the “Improving” or even “Leading” quadrant.

Microeconomic Factors:

• Earnings Results: If a specific sector’s earnings are better than expected, you might see a sharp upward movement of that sector’s position on the graph, transitioning from the “Lagging” to the “Improving” quadrant. Conversely, poor earnings can cause a fall towards “Lagging.”

Market Sentiment and External Shocks:

• Geopolitical Events: Sudden events like geopolitical tensions might lead to a quick movement of defensive sectors like utilities or healthcare towards “Leading,” while cyclical sectors could lose momentum and fall to “Lagging.”
• Commodity Price Changes: If oil prices fall significantly, oil-sensitive sectors like airlines may quickly move from “Weakening” to “Improving,” while the energy sector itself might drift towards “Lagging.”