How Does Sector Rotation Look Right Now?

With most of the major US stock market averages at or near all-time highs, I can't think of a better time to take a look at how its sectors are rotating in strength. One of my favorite Bloomberg functions is the RRG, or Relative Rotation Graph. The x-axis represents the relative strength for each S&P sector and the y-axis shows us the momentum in that relative strength. They rotate clock-wise with the upper right quadrant showing the leaders, lower right shows the weakening areas, then lagging, improving and so on and so on.

What stands out to me here is the Financials entering the lagging quadrant as it leaves the weakening group. This chart I built uses a weekly time frames in order to represent what I consider to be the bigger picture. I can't say I'm surprised since Financials peaked relative to the S&P500 over three months ago and looking worse and worse every day. In a strong bull market you want these guys leading, not lagging. (click chart to embiggen)

Another sector that stands out here is the Materials space. You see this one in light green on the upper right? That's probably not where we want to lean short. Also, with rates getting hit lately, we see the price action in Utilities and Telecoms perking up a bit. But the RRG still has them in the lagging group. We'll be watching these guys to see if they can improve going forward.

As a quick note, when we look at this particular function, we mostly want to pay attention to the sectors plotted around the outside of the graph and ignore the noise towards the middle. If they are around the outer edges, we can trust that it is a much more sustainable trend.

If you're interesting in learning more about the Relative Rotation Function, here is a quick post a did about it back in January.

Tags: $SPY $XLB $XLF $IYZ $XLU