For the 8 weeks ending in 12/7/20, there have been several changes in the S&P 500 sector rotations within the four Relative Rotation Graph (RRG) quadrants (i.e., Leading, Weakening, Lagging, and Improving). Remember, the objective of the RRG study is to display the relative strength and momentum of the eleven S&P 500 sectors within the quadrants. Sectors with strong relative strength and strong momentum appear in the Leading Quadrant (green). As relative momentum fades, the sector typically moves into the Weakening Quadrant (yellow). When relative strength declines, the sector then moves toward the Lagging Quadrant (red). Finally, when momentum strengthens it will shift toward the Improving Quadrant (blue).
Three significant S&P sector rotations have occurred that merit attention.
First, the Communication Services Sector (XLC) has crossed over from the Weakening Quadrant into the Leading Quadrant (Green). The ability of XLC to maintain its positioning in the Leading Quadrant hint at the reemergence of the leadership group.
The Financial Sector (XLF) has also moved from the Improving Quadrant into the Leading Quadrant. This is a significant technical development as the Financial sector has been confined predominately to the Improving Quadrant over the past 6-months. The ability of XLF to maintain its position within the Leading Quadrant suggests the emergence of a relative strength leadership.
On the downside, the S&P Real Estate Sector (XLRE) has slipped from the Improving Quadrant back down to the Lagging Quadrant. The decline appears to be the result of a sudden and dramatic drop in price momentum. The deterioration warns of this sector losing market sponsorship. If relative strength also begins to decline, then this implies investors may be leaving this group.
Attached below is the S&P 500 sector RRG chart. Also, included are the Financial, Communication Services, and Real Estate sub-industry groups ranked by SCTR score. The SCTR scoring will further identify the emerging leadership and lagging sub-industries in the respective S&P sectors. The final charts depict the SCTR ranking of the S&P 500 names within the three sectors. Again, this will help investors to distinguish between the outperforming versus underperforming names in each of the S&P 500 sectors. Since year-end is around the corner, it is reasonable to expect window-dressing activities may accelerate the speed of the sector rotations, especially in the strongest and the weakest SCTR ranked names.
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