Decoding Relative Rotation Graphs: Tracking Sector Momentum Before Price Follows

When market participants examine financial charts in isolation, they frequently fall into the trap of analyzing absolute price momentum while remaining blind to relative rotational shifts. A stock or sector index might appear to be breaking out to a multi-week high in nominal currency terms, yet in relative terms against the benchmark index (such as the SET50 or S&P 500), it may actually be lagging or rapidly decelerating.

At Flow Orbit Core, one of the foundational frameworks we teach in our Sector Rotation Lab is the Relative Rotation Graph (RRG), originally conceptualized by Julius de Kempenaer. An RRG visualizes the relative strength of multiple securities or sector indices simultaneously on a single two-dimensional plane.

Understanding the Dual Axes of the RRG Plane

The beauty of the RRG framework lies in its coordinate system, built upon two specific indicators: the JdK RS-Ratio on the horizontal axis (X) and the JdK RS-Momentum on the vertical axis (Y).

• RS-Ratio (X-Axis): Measures the relative strength trend of the sector against the benchmark. A reading above 100 indicates that the sector is in an established relative uptrend versus the market.
• RS-Momentum (Y-Axis): Measures the rate of change or velocity of the RS-Ratio. A reading above 100 means relative momentum is accelerating, while below 100 signals deceleration.

The Four Rotational Quadrants

These two axes divide the chart into four distinct quadrants, through which sectors typically rotate in a clockwise trajectory over time:

1. Leading (Top-Right): High relative strength and positive relative momentum. These are the market's primary leaders where institutional capital is actively concentrating.
2. Weakening (Bottom-Right): Relative strength remains above 100, but relative momentum is falling below 100. The sector is still outperforming the benchmark overall, but its lead is narrowing and exhaustion is setting in.
3. Lagging (Bottom-Left): Both relative strength and relative momentum are below 100. Capital is draining from this sector, and it consistently underperforms the broad index.
4. Improving (Top-Left): Relative strength is still below 100, but relative momentum has turned positive and crossed above 100. This is the seedbed of new leadership, where early institutional accumulation begins before visible nominal price breakouts.

Practical Implementation: Spotting Clockwise Rotational Tails

In our weekly study sessions, we focus on observing the rotational tail of each sector over 5 to 10 weeks. A long tail moving upward and rightward from the Improving quadrant toward the Leading quadrant provides strong empirical evidence that capital is reallocating into that industry.

By identifying sectors as they transition from Improving into Leading, technical analysts can focus their stock selection efforts strictly on the constituent equities with the strongest tailwinds, avoiding the friction of fighting broader sector headwinds.