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How to Use RRG Charts in Trading

Written by admin. Posted in Technical Analysis

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The relative rotation graph (RRG) is a sophisticated tool in technical analysis to help investors decide which sectors, individual stocks, and other assets to pursue. Investors can use it to visually compare the performance and momentum of securities and asset classes against a benchmark. RRGs plot assets on a two-dimensional graph, with the x-axis representing the relative strength ratio and the y-axis for relative strength momentum. This format enables traders and investors to visually assess the relative strength and trendline of different securities, making it valuable for trading, rotation, and asset allocation strategies.

Key Takeaways

  • The relative rotation graph (RRG) is a chart used in technical analysis to test the performance and momentum of securities or asset classes against a benchmark.
  • RRGs provide a comprehensive view of the market, helping investors to spot trends, compare multiple securities simultaneously, and make more informed decisions when rebalancing portfolios.
  • RRGs should be used with other forms of analysis since they are a partial view of the market.
  • Several tools and resources are available to create and analyze RRGs, ranging from professional-grade software from Bloomberg and Optuma to more accessible platforms like StockCharts.com.

What is the Relative Rotation Graph?

RRGs are used to identify which stocks or sectors are underperforming and outperforming a market index or benchmark. The RRG has four quadrants: leading, weakening, lagging, and improving. Each quadrant is for different stages of an asset’s performance cycle, providing insights into the rotation of market leadership. This movement of securities through the quadrants helps to spotting trends and potential reversals and could provide investors with a strategic advantage in both short-term and long-term trading.

RRGs were created by Julius de Kempenaer in the early 1990s to visualize the relative performance of stocks and other securities against a benchmark and each other. De Kempenaer’s work has been valuable for helping investors make more informed decisions about trading, rotation, and asset allocation.

RRGs are an excellent visual way of analyzing market trends and relative performance. However, like all technical tools, they should be used with other techniques for a more comprehensive approach to trading and investing.

Understanding the Parts of the Relative Rotation Graph

The key elements of RRG and how they indicate relative strength and momentum are as follows:

  • Axes: The x-axis is the relative strength ratio. This axis measures the performance of a security relative to a benchmark (hence, the strength is “relative”). A value more than 100 indicates outperformance, while a value less than 100 indicates underperformance. The y-axis represents the momentum of the relative strength. This axis shows the rate of change in the relative performance. It is essentially the momentum of the relative strength ratio,
  • Top right quadrant: The top right quadrant in the RRG is the leading quadrant. Securities in this quadrant are outperforming the benchmark, and their momentum is positive. This indicates strong and improving performance.
  • Bottom right quadrant: The bottom right quadrant is the weakening quadrant. Here, securities are still outperforming the benchmark, but their momentum is decreasing. Being here suggests that while they are strong, they might be losing their edge.
  • Bottom left quadrant: This is the lagging quadrant. Securities in this area are underperforming the benchmark with negative momentum. It is a sign of weakness.

  • Top left quadrant: This is the improving quadrant. This quadrant contains securities that are underperforming the benchmark but show increasing momentum. Being here suggests the potential for a turnaround.
  • Data points and movement: Each security or asset is represented as a data point on the graph. The position of a data point within the graph indicates its relative strength and momentum. The movement of these data points is tracked over time, usually in a clockwise direction through the quadrants, which illustrates the evolution of their relative performance.

RRGs help investors spot trends and compare several securities at once. However, RRGs should be used with other forms of analysis since they provide a relative, not absolute, view.

How to Interpret Relative Rotation Graphs

Interpreting RRGs involve analyzing the patterns and movements of securities on this chart to identify market leaders, laggards, and potential rotation opportunities.


Weekly Relative Rotation Graph of Magnificent Seven Stocks as at 18th December 2023.

stockcharts.com


Movements and Patterns in RRGs

Securities in the RRG generally move clockwise through the four quadrants. This rotation reflects the natural ebb and flow of securities’ relative strength and momentum relative to a benchmark. In addition, the further a security is from the center, the stronger its relative strength or weakness is compared with the benchmark. A security far out in the leading or lagging quadrant has a strong trend, whether positive or negative.

The speed at which a security moves through the quadrants can indicate the stability of its trend. Rapid movements might suggest more volatile or less stable trends. Indeed, many RRGs show tails behind the data points, representing their historical path. Longer tails provide more context on historical performance and trend stability.

Identifying Market Leaders and Laggards

Securities in the leading quadrant are outperforming the benchmark with positive momentum and are considered market leaders. A security with a presence or movement deeper into this quadrant suggests a strong and stable outperformance. Meanwhile, securities in the lagging quadrant are underperforming and have negative momentum. These are the laggards of the market. A security that is continuously in or moving deeper into this quadrant has a strong downtrend relative to the benchmark.


Monthly US Sector Rotation as at December 1 2023.

stockcharts.com


Identifying Rotational Opportunities

A security moving from the improving quadrant into the leading quadrant can be an opportunity. This shift indicates a security is starting to outperform the benchmark with increasing momentum. Similarly, a security moving from the weakening to the lagging quadrant suggests that its previous outperformance is deteriorating, and it is now starting to underperform. This could signal a selling opportunity or a warning to avoid new investments.

Meanwhile, a move from lagging to improving suggests that a security is beginning to reverse its underperformance. This indicates an early stage of recovery, a potential buying opportunity for contrarian investors. Also, securities shifting from leading to weakening are still outperforming but are losing momentum. This could be a signal to take the profits or closely watch the situation to see if it continues losing steam.

Using Relative Rotation Graphs with Other Technical Tools

RRGs can be more effective when put together with other charts in the technical analyst’s toolkit. For example, once an RRG helps determine sectors or stocks that are showing relative strength, you can then review stocks in those sectors in greater depth. Candlestick patterns and volume analysis can give more details on the trading behavior for specific stocks, clueing you in about potential reversals in price trends. Indicators like moving averages, the relative strength index (RSI), and Bollinger Bands can also be used to assess the momentum and volatility of these stocks, helping you decide on entries and exits.

In addition, the RRG’s ability to depict sector rotation can provide great help for those using a top-down investment approach. When showing the sectors moving into the leading quadrant, you might allocate more to sectors poised for growth and reduce your exposure to those going into the lagging quadrant. This sector rotation strategy can be particularly useful during different phases of the economic cycle, as certain sectors tend to do better than others based on the economic conditions. This then points to how fundamental analysis can be used with RRG for a fuller picture of particular sectors and their prospects.

Benefits and Limitations of Relative Rotation Graphs

RRGs offer several advantages and limitations when used in trading, analysis, and portfolio management. Understanding these can help make better use of them for investing.

Benefits and Limitations of Relative Rotation Graphs

Benefits

  • Easy Visualization of Market Dynamics

  • Comparison Tool

  • Helps Identify Trends

  • Helps with Timely Decision Making

  • Complements Other Analysis

  • Helps with Deciding Asset Allocation

Limitations

  • Shows Relative, Not Absolute Rotation

  • Lagging Indicator

  • Requires a Benchmark

  • Not a Standalone Tool

  • Provides no Indication of Value

Benefits of Relative Rotation Graphs

Here are some benefits of RRGs:

  • Visualizing market dynamics: RRGs provide a clear, visual representation of the relative strength and momentum of various securities or sectors, making it easier to understand complex market moves.
  • Comparison tool: With RRGs, you can compare several securities simultaneously against a benchmark, which can be valuable for portfolio diversification and sector rotation strategies.
  • Identifying trends: RRGs help pick out leaders, laggards, and emerging trends by observing the movement of securities through different quadrants.
  • Timely decision-making: The dynamic nature of RRGs aids investors in making timely decisions by highlighting changes in momentum and strength before they become evident through price movements alone.
  • Complementing other analyses: RRGs can be used alongside other technical, fundamental, and quantitative analysis tools, providing a more holistic view of the market.
  • Sector and asset allocation: RRGs are particularly useful for sector analysis and distributing assets since they help identify industries or asset classes likely to outperform or underperform.

Limitations of Relative Rotation Graphs

Here are some limitations of RRGs:

  • Relative, not absolute, rotation: RRGs illustrate the performance relative to a benchmark, not the absolute performance. A security in the leading quadrant could still be losing value in a bear market.
  • Lagging indicator: RRGs inherently lag. They reflect past performance and trends, which may not always predict future movements.
  • Requires a benchmark: The effectiveness of RRGs depends on the choice of an appropriate benchmark, which can vary based on the assets.
  • Not a stand-alone tool: RRGs should not to be used in isolation. They do not deliver insights into company fundamentals, macroeconomic conditions, or market sentiment.
  • No indication of value: RRGs do not provide information about the value of securities. A stock might be moving into the leading quadrant but still be overpriced.

While RRGs are powerful for visualizing and analyzing market trends and relative performance, they are most effective when used as part of a broader, diversified approach to investment analysis and decision-making. Understanding their limitations is crucial to avoid overestimating their relevance.

Differences Between the Relative Rotation Graph and the Relative Strength Index

The Relative Rotation Graph vs. the Relative Strength Index

Relative Rotation Graph (RRG)

  • Scope: RRG is used to compare several securities against a benchmark.

  • Dimensions: RRG provides a two-dimensional view.

  • Interpretation: RRG is better for relative performance and identifying trends.

  • Usage: RRG is typically used for asset allocation and sector rotation.

Relative Strength Index (RSI)

  • Scope: The RSI is used for analyzing the price momentum of a single security.

  • Dimensions: The RSI is a one-dimensional oscillator.

  • Interpretation: The RSI illustrates momentum and potential price reversals.

  • Usage: RSI is commonly used to identify potential entries and exits.

The RRG and the relative strength index (RSI) are both used in technical analysis, but serve different purposes and provide different kinds of information. RRGs are used for comparing several securities against a benchmark, while the RSI is for analyzing the price momentum of a single security. In addition, RRGs offer a two-dimensional view (strength and momentum), while the RSI is a one-dimensional oscillator (it constructs high and low bands and provides a trend indicator).

RRG is best used for relative performance and identifying trends. Meanwhile, the RSI is best for ascertaining momentum and potential price reversals. Another set of differences is that RRG is often used for asset allocation and sector rotation, while the RSI commonly helps identify potential entries and exits.

As such, RRG is more for visualizing and comparing the relative strength and trends of multiple securities, and the RSI sets out the momentum of individual securities and can help identify when there are overbought or oversold conditions.

Resources for Creating Relative Rotation Graphs

Making your RRGs requires specialized tools and resources, as these graphs involve complex calculations and dynamic visuals. Here are some great tools to use:

  • RRG Research: Founded by Julius de Kempenaer, the creator of RRGs, the firm’s site provides tools and insights related to RRGs. The website offers educational resources, analysis, and access to RRGs.
  • Bloomberg Professional Services Software: The Bloomberg Professional Services software, a leading financial data and analytics platform, offers RRG charts as part of its services. It provides functions for creating and customizing RRGs, making it a popular choice among professional investors and analysts.
  • Refinitiv Eikon: This platform is another leading financial data and analytics provider that offers RRG charts as part of its services.
  • StockCharts.com: This online platform offers various chart tools, including RRGs. It has a user-friendly interface for creating RRGs, suitable for professionals and individual investors.
  • Optuma: Optuma is a professional-level technical analysis software that includes RRGs among its features. Known for its advanced analysis tools, Optuma caters to professional traders and analysts.

The tool you choose depends on your needs, skill level, and access to resources.

Which Technical Analysis Indicators Work Well with Relative Rotation Graphs?

Combining RRGs with other indicators can provide a more comprehensive view of the market and help refine investment strategies. Some indicators include moving averages, the RSI, the moving average convergence divergence, Bollinger Bands, support and resistance levels, and other chart patterns.

What Asset Groups Work Well with Relative Rotation Graphs?

RRGs are best used to analyze asset groups when relative performance is key. These can include equity sectors and industries, exchange-traded funds, indexes, benchmarks, fixed-income securities, commodities, and currencies. RRGs’ ability to compare several assets simultaneously makes them invaluable for a wide range of investment strategies from picking individual stocks to deciding on broad asset allocations. However, with all financial and investment tools, they should be used as part of a broader, diversified approach to market analysis and not relied upon in isolation.

Which Benchmarks Work Well with Relative Rotation Graphs?

The benchmark chosen is critical in interpreting RRGs, setting the standard against which the other securities or asset classes are measured. The benchmark to use depends on the type of assets being analyzed and the specific goals of the analysis. Some commonly used benchmarks include broad market, sector, fixed-income, commodity, regional, country-specific, currency, real estate, and thematic indexes.

How Can the Reliability of Relative Rotation Graphs Be Improved?

Increasing the reliability of RRGs involves choosing the right benchmarks, using quality data, understanding the tool’s limitations, and integrating it with other forms of analysis. Regular reviews, adaptation to changing market conditions, and ongoing education are essential for effectively using RRGs in trading and investments.

The Bottom Line

RRGs are vital for some types of technical analysis, offering a way to visualize the relative performance and momentum of different securities against a chosen benchmark. Its design, characterized by placing securities in four distinct quadrants—labeled leading, weakening, lagging, and improving—allows traders and investors to quickly grasp shifts in the market and identify assets gaining or losing strength against others. This makes RRGs particularly useful for strategies involving sector rotation, asset allocation, and portfolio diversification.

For traders, RRGs provide a strategic edge by enabling a clear understanding of various market segments’ relative trends and strengths. By integrating RRG analysis with other technical indicators and fundamental insights, traders can identify potential entry and exit points more effectively.

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341 Meeting

Written by admin. Posted in #, Financial Terms Dictionary

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What Is a 341 Meeting?

The term “341 meeting” refers to a meeting between creditors and debtors that is required to take place during the course of a Chapter 7 bankruptcy proceeding. Accordingly, its name is derived from section 341 of the bankruptcy code.

A 341 meeting is typically scheduled roughly one month after a debtor files for bankruptcy. To be considered legally valid, the meeting must include both the individual filing for bankruptcy and the court-appointed bankruptcy trustee.

Key Takeaways

  • A 341 meeting is an important stage in the Chapter 7 bankruptcy process.
  • It is intended to establish the facts of the bankruptcy in question and to facilitate the negotiation of a repayment plan between the debtor and their creditors.
  • Generally, 341 meetings occur at the offices of the trustee, rather than in a courtroom.

How 341 Meetings Work

The 341 meeting is one of many stages involved in declaring bankruptcy in the United States. Its primary purpose is to establish the facts of the bankruptcy in question, and to ensure that all the paperwork necessary to carry out the bankruptcy proceedings are in order. Although the attorneys of the debtor and creditor are welcome to attend, the only parties whose presence at the 341 meeting is legally required are the debtor in question and the court-appointed trustee.

Prior to the 341 meeting, the trustee would have already reviewed the bankruptcy paperwork and financial records submitted by the debtor. The purpose of the 341 meeting, therefore, is principally for the trustee to confirm the facts stated by the debtor and to collect any additional paperwork that may be required. In the event that the debtor is attempting bankruptcy fraud, this would likely be detected by the trustee during or prior to the 341 meeting.

From the debtor’s perspective, the objective of the 341 meeting is to provide the necessary documents in order to prove that their identity is authentic, while also establishing their current assets, liabilities, income, expenses, and other relevant financial circumstances. If the creditors are in attendance, they will be able to ask clarifying questions, such as whether the debtor is entitled to any upcoming income sources, ie. tax rebates or inheritances, or whether the debtor owns undisclosed assets, such as shares in a private business or assets held overseas.

Typically, discussion at 341 meetings will center on how the debtor plans to eventually repay their obligations.

Real World Example of a 341 Meeting

Peter is a bankruptcy trustee currently presiding over a 341 meeting. The debtor present declared bankruptcy over a $5,000 debt, and has attended the meeting along with his bankruptcy lawyer. Likewise, the creditor and her lawyer are also present.

Peter’s first priority is to verify the identity and financial status of the debtor. Although Peter already reviewed many documents prior to the meeting, the 341 meeting provides an occasion to ask follow-up questions about the documents provided and to obtain any additional disclosures deemed necessary. In the unlikely event that the debtor were attempting bankruptcy fraud, this would also likely be detected due to discrepancies or inadequacies in the documents provided.

During the meeting, the lawyers for the debtor and creditor engaged in detailed conversation regarding the debtor’s assets, liabilities, and income sources; and were able to negotiate a general plan for the gradual repayment of the outstanding debt. As is the case with most 341 meetings, the meeting took place at Peter’s office, rather than in court before a judge.

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Annualized Income Definition, Formula, Example

Written by admin. Posted in A, Financial Terms Dictionary

Annualized Income Definition, Formula, Example

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What Is Annualized Income?

Annualized income is an estimate of the sum of money that an individual or a business generates over a year’s time. Annualized income is calculated with less than one year’s worth of data, so it is only an approximation of total income for the year. Annualized income figures can be helpful for creating budgets and making estimated income tax payments.

Understanding Annualized Income

Annualized income can be calculated by multiplying the earned income figure by the ratio of the number of months in a year divided by the number of months for which income data is available. If, for example, a consultant earned $10,000 in January, $12,000 in February, $9,000 in March and $13,000 in April, the earned income figure for those four months totals $44,000. To annualize the consultant’s income, multiply $44,000 by 12/4 to equal $132,000.

How Estimated Tax Payments Work

Taxpayers pay annual tax liabilities through tax withholdings and by making estimated tax payments each quarter. There are many sources of income that are not subject to tax withholding. Income from self-employment, interest and dividend income and capital gains are not subject to tax withholdings, along with alimony and some other sources of income that may be reported to a taxpayer on Form 1099. To avoid a penalty for tax underpayment, the total tax withholdings and estimated tax payments must equal to the lesser of 90% of the tax owed for the current year or the full tax owed the previous year.

Examples of Annualized Income That Fluctuates

Computing estimated tax payments is difficult if the taxpayer’s income sources fluctuate during the year. Many self-employed people generate income that varies greatly from one month to the next. Assume, for example, that a self-employed salesperson earns $25,000 during the first quarter and $50,000 in the second quarter of the year. The higher income in the second quarter indicates a higher total level of income for the year, and the first quarter’s estimated tax payment is based on a lower level of income. As a result, the salesperson may be assessed an underpayment penalty for the first quarter.

Factoring in the Annualized Income Installment Method

To avoid the underpayment penalties due to fluctuating income, the IRS Form 2210 allows the taxpayer to annualize income for a particular quarter and compute the estimated tax payments based on that amount. Schedule AI of Form 2210 provides a column for each quarterly period, and the taxpayer annualizes the income for that period and computes an estimated tax payment based on that estimate. Using the salesperson example, Form 2210 allows the taxpayer to annualize the $25,000 first quarter income separately from the $50,000 second quarter income.

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What Is an Assortment Strategy in Retail, and How Does It Work?

Written by admin. Posted in A, Financial Terms Dictionary

What Is an Assortment Strategy in Retail, and How Does It Work?

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What Is an Assortment Strategy?

An assortment strategy in retailing involves the number and type of products that stores display for purchase by consumers. Also called a “product assortment strategy,” it is a strategic tool that retailers use to manage and increase sales. The strategy is made up of two major components:

  1. The depth of products offered, or how many variations of a particular product a store carries (e.g. how many sizes or flavors of the same product).
  2. The width (breadth) of the product variety, or how many different types of products a store carries.

Key Takeaways

  • An assortment strategy is a strategic retail industry sales tool that optimizes the variety of goods offered for sale.
  • This strategy is centered around the concepts of “a deep assortment” and “a wide variety.”
  • Product assortment strategies got their start in the context of brick-and-mortar stores, but have since been carried over successfully to e-commerce platforms.

How Assortment Strategies Work

Essentially, a product assortment strategy is a retail industry sales tool with the concepts of depth and breadth at its core. However, not all retailers will be able to use both components of this strategy at the same time.

An assortment strategy can have many layers of sub- and related strategies, as each store will need to tailor the strategy to address its own particular needs and goals.

A deep assortment—the opposite of a narrow assortment—of products means that a retailer carries a number of variations of a single product. A wide variety—the opposite of a narrow variety—of products means that a retailer carries a large number of different kinds of products.

An assortment strategy is not one-size-fits-all; it needs to be customized to respond to a business’s parameters.

A Challenge for Small Stores

Retailers face a trade-off when determining an assortment strategy. Choosing both a wide variety and a deep assortment of products simultaneously requires a large amount of space, and is typically reserved for big-box retailers.

Stores with smaller spaces may choose to specialize in a certain type of product and offer customers a variety of colors and styles; other stores may offer a deep assortment of products but a narrow variety—one reason why a 7-Eleven (private since 2005) might carry just one brand of canned cat food, for example, while a Kroger (NYSE: KR) likely would have the space to stock 12 brands of canned cat food, if it chose to.

A Brick-and-Mortar Term

Originally, assortment strategy referred only to brick-and-mortar stores because the strategy’s components of depth and breadth had a lot to do with physical space and the visual and tactile interaction between consumer and product. Recently, though, all sales venues—brick-and-mortar, click and mortar, and e-tailing—have used varieties of the strategy to gain competitive advantage.

Adjusting for Demographics

By grouping together items that they believe will appeal to certain types of customers, retailers may fine-tune their assortment strategies to target consumers’ demographic profiles. If a retailer wants to attract customers who are new parents, for example, it might fill the shelves with infant apparel from trendy brands, along with toys, bedding, and other products new parents need.

A Strategic Selling Tool

A strategically arranged product assortment can upsell customers on supplemental items as they search for the item that brought them to the store.

Grouping related items together strategically, whether or not they are necessities, is a common way to stimulate impulse buying:

  • By placing garden hoses near sprinklers and other lawn-care products, a retailer might drive more into a customer’s basket. Likewise, installing a luxurious patio dining set—complete with attractive outdoor dishware and bar accessories—in the middle of the more prosaic yard-care products could even send some customers scurrying to the housewares section of the store.
  • A presentation of flashlights—or any battery-driven product—could include a nearby display of the batteries needed to use the product. Or a manager could locate the batteries near the check-out counter to remind customers before they leave the store that the flashlight won’t work without batteries.

Potential Disadvantages of Assortment Strategies

Although the depth of product assortment may help attract customers, there are certain caveats to relying only on an assortment strategy. If items in an assortment are placed incorrectly, the demand for these products may vary drastically.

If less-popular items are mixed in with popular items, for example, they could detract from the more-popular items’ appeal. Or, if the assortment is too vast, customers may have difficulty finding the item they are seeking. Overwhelming shoppers with too many buying options can be counterproductive and discourage customer engagement.

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