strategies

Charts

Profiting From Rotation

RRG can help you spot important shifts in market leadership by charting
the relative strength of sectors or securities. By Paul Ciana, cmt

Most hedge funds, mutual funds and

asset managers measure their performance

against a benchmark. It may be the Standard &
Poors 500, Merrill Lynch Commodity Index eXtra or Barclays Capital Aggregate index or some
other broad group of securities. If managers underperform benchmarks, their bosses generally
wont be pleased. Nor will their investors, who
may withdraw money and move it elsewhere.
So, knowing which groups of securities are

starting to under- or outperform your benchmark

is an important part of staying ahead. To help do
that, you can use the Relative Rotation Graph
(RRG) function to analyze shifts in the leadership
in your universe. Created by Julius de Kempenaer,
RRG is contributed to the Bloomberg Professional
service by his Gibraltar-based company, RRG Ltd.
Type RRG <Go> to use the function. The default view
displays the 10 Global Industry Classification Standard sectors of the S&P 500 compared with the index during a 12-week period.
The scatter plot displayed in RRG is

built around two centered axes, creating four

sections. These quadrants are defined as leading, weakening, lagging and improving. In
essence, RRG normalizes several series of data so
you can compare multiple securities or sectors
that have varying levels of momentum and performance in one graph.
Type RRG
<Go> for
the Relative
Rotation Graph
function.
RRGs scatter
plot is divided
into quadrants.
Sector Rotation

An RRG chart shows

decreasing investor interest
in the S&P 500s previously
leading groups: consumer
staples, technology and utilities.

1 1 4 bloomberg
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b l o o m b e r gmarkets
m a r k e t s March
Decem
2012
ber 2010

underperform with decreasing momentum. (A

short sale is a bet that a
securitys price will
drop.) According to de
Analyzing assets
Click on the arrow to the right of
Kempenaers contribuSource and select Equity Index
tion in New Frontiers in
and enter IT30 in the NAME
Technical Analyfield for an index of Italian stocks.
sis: Effective Tools
outperformer
A chart of Italian stocks
and Strategies for
versus the Dow shows
Trading and InTenaris rotated into
vesting (Bloomthe leading quadrant
in December.
berg Press, 2011),
his backtesting
suggests that to maximize returns, picking
the best investments is
actually less important
than avoiding the worst.
One timely way to use RRG is to generate ideas
for investing in financial markets that are in turmoil. Take Italy, for example, where stocks were
buffeted by the euro-zone debt crisis in 2011. To
compare the stocks in the Dow Jones Italy Titans
30 Index against the Dow Jones Industrial Average, type RRG <Go> again. Click on the arrow to
the right of Source and select Equity Index. In the
A chart shows Tenaris shares nearing multiple resistance levels in December after gaining
NAME field, enter IT30. Tab in to the BASE field
57percent. A break through those levels could propel the stock back to its January 2011 high.
and enter INDU, click on Dow Jones Industrial
Average in the list of matches and press <Go>.
In RRG, the x-axis represents the JdK RS-Ratio,
As you can see above, Tenaris SA, the worlds
a proprietary measure of relative strength. If a data largest producer of seamless steel pipes used in
point falls on the right side of 100 (in the leading the oil industry, had rotated from lagging to leador weakening quadrants), the security or sector ing as of December. Another interesting stock was
is outperforming its benchmark. When it falls to Atlantia SpA, Italys biggest toll-road operator.
the left side of 100 (in the lagging or improving
In Milan trading, shares of Luxembourgquadrants), its underperforming.
based Tenaris rose 57 percent to 14.18 euros
on Dec.29 from their low on Oct. 4. The shares
The Y-axis is JdK RS -Momentum, a traded through their 50-day moving average as
proprietary measure of the rate of change in the well as through the 38.2 percent and 50 percent
RS-Ratio line. If a data point falls above 100 (in the retracement levels from the stocks January 2011
improving or leading quadrants), its relative high. For much of December, the stock was litperformance is increasing in momentum. If a tle changed as price neared multiple resistance
data point falls below 100 (in the weakening or levels, including a downward-sloping trend line,
lagging quadrants), its performance
earlier highs in December, the 200-day
is decreasing in momentum.
moving average and the 61.8 percent
TIP BOX
To make good relative returns,
retracement. A break through those
an asset manager could invest in or
levels could propel the stock back to its
Type RRGR
overweight the sectors that are conJanuary 2011 high of 18.76.
<Go> for more
information
sistently outperforming and have inabout Relative
Paul Ciana, CMT, is an equities application
creasing momentum. They could sell
Rotation Graph.
specialist at Bloomberg in New York.
pciana@bloomberg.net
short, underweight or avoid those that

March 2012 bloomberg markets 115