Using Relative Rotation Graphs for Sector Selection

Investing in the right sector can be a key determinant of success in the financial markets. However, with numerous sectors and subsectors (let’s not forget about international markets) to choose from, selecting which sectors to allocate in a portfolio can be a bit overwhelming.

Traditional approaches such as fundamental analysis and technical indicators provide valuable insights, but they may not capture the dynamic nature of sector rotation, and if they do it is sometimes well into an already established trend.

During the period between 2000-2010, small-caps outperformed their large-cap counterparts. Looking at a relative strength chart, like the one below, it becomes obvious which area to favor.

However, the problem arises when we try to decide in real-time (instead of hindsight) when the trend begins.

I have found relative rotation graphs (RRG) to be a great tool to help unde…