top of page
Search

How to profit from the outperforming Relative Rotation Strategies.



Using the power of Relative Rotation Graphs (RRG), RRS provides superior performance by being in the right place at the right time!


The Relative Rotation Strategies consist of 1 stock strategy and 3 ETF strategies. Each of the 4 strategies is based on the same principle of using RRG to be in the right place at the right time. TPA provides different strategies to satisfy the various risk profiles, holding periods, and portfolio rules for all RRS users.


The strategies are:

1. Relative Rotation Fund

2. Top 5 and Bottom 5 ETFs

3. Top 5 ETFs and a S&P500 Hedge

4. Top 5 ETFs – Long Only


Performance and relative performance for these strategies have been off the charts.

Equally important, the outperformance has been consistent since inception.

1. The Relative Rotation Fund is created using the weekly Top and Bottom ranked stocks in the TPA-RRG report. The fund holds 60 stocks; 30 long and 30 short. The portfolio is created by buying the Top 10 and selling short the Bottom 10 ranked stocks each week. Screens are used to ensure that overbought and oversold stocks are not included. Long positions have twice the weight of short positions. This is a nod to history, which has shown that stocks approximately go up twice as much as down on a daily basis. Since new stocks are added each week, each position is held for 3 weeks. Rebalancing occurs as close as possible to Friday’s closing prices. (Trades and returns are hypothetical.)


Each week the TPA-RRG Report scores and ranks its ETF universe and uses it for its RSS Strategies:

2. Top 5 and Bottom 5 ETFs – Buys the Top 5 ETFs and Sells short the Bottom 5 ETFs each week. Each position is held for 3 weeks. The 3-week holding period means that each week we trade out of the positions from 3 weeks ago and add the current week’s TOP 5 and Bottom 5. Each week’s trades account for approximately 1/3 of the portfolio. Shorts are always ½ the value of longs.

3. Top 5 ETFs and a S&P500 Hedge – Buys the Top 5 ETFs each week and maintains a long SH position that is ½ the value of the long ETFs.

4. Top 5 ETFs – Long Only – Each week the TOP 5 ETFs are purchased. The holding period is 3 weeks. Each week accounts for 1/3 of the portfolio.


What are RRGs?

Julius de Kempenaer developed Relative Rotational Graphs (RRG) in 2004 and thousands of investors use RRGs. RRGs, are a unique visualization tool for relative strength analysis. As a stock moves from left to right it is gaining relative strength (is outperforming the S&P500 in a given period. Alternatively, as a stock moves right to left it is losing relative strength. The genius of RRG’s is Relative Strength Momentum, which tells investors if relative strength is increasing or decreasing. This is what creates the clockwise motion of stocks and ETFs within an RRG and defines the four phases of a relative trend. True rotations can be seen as securities move from one quadrant to the other over time.


The RRG above shows the normal process of stocks moving in and out of favor. Starting in the upper left, the Improving quadrant, a stock should move left to right as it outperforms the S&P500 for the RRG’s given period. Finally, when it has exhausted this phase and it deep in the Leading quadrant, the stock will begin to move lower as its relative performance weakens. This lessening of Relative Strength is defined as lower Relative Momentum. Momentum continues to fall until finally the stock starts to lose Relative Strength for the given period and begins to move right to left. As the stock underperforms it will move deep into the Lagging quadrant until this phase is exhausted. The stock will begin to underperform at a slower rate; this is when it is gaining relative momentum and starts to move higher into the Improving quadrant. Now, the cycle begins anew.


What are TPA-RRG scores?

TPA recognizes the power of RRGs to highlight stocks and sectors moving in and out of favor, but also wanted to simplify the process of using RRG to decide where to invest. TPA has developed TPA-RRG Scores to be able to rank stocks and sectors in terms of relative strength. TPA-RRG scores are constructed to focus on stocks and sectors as they move from negative to positive and positive to negative. Scoring also allows stocks and ETFs to be ranked so investors can focus on the best and worst areas of the market.


The following example will illustrate how and why TPA-RRG and RRS work:


1. Sector RRG from 4/7/23 is below. We have highlighted XLK (TECH). Also note the green and red boxes. These areas is what the algorithm targets as highly actionable. RRS is not trying to capture ETFs that have moved too far to the upper right (overbought) or too far to the lower left (oversold).


2. The scores and ranking below do not capture the extremes of relative strength or relative momentum. Instead, TPA’s algorithm looks to capture sectors as they turn the corners from negative to positive or positive to negative. By focusing on the inflection point, we target the sectors with the greatest potential.


3. The RRG below shows where XLK (TECH) is right now. The next RRG’s will show how XLK got to where it is now.


4. RRGs 1 through 4 below shows the path that XLK took from September 2022 to April 2023. In RRG 1, XLK has been a buy, but is now in an exhaustion phase and close to being a sell. (2) is a period during which XLK was a sell. (3) XLK is close to being a buy and (4) shows the period during which XLK was a buy. XLK may soon be at the exhaustion phase again.

To further illustrate the power of RSS strategies, The image below shows the ranking each week for TECH (XLK) in the top panel and the relative performance chart of XLK (XLK/SPY) in the lower panel. Top ranking in the upper panel coincides with outperformance in the lower panel. Note, like any security, XLK gets extended in either direction after about 9 to 12 weeks. Right now, XLK is getting to the point where it has spent too long in the top 5.


Investors can take advantage of TPA-RRG in a number of ways:

1. Invest in one of the four Relative Strength Strategies.

2. Find stocks and sectors that are high scoring and highly ranked

3. Make sure they exit stock and sectors that have low scores and low rankings.



If you have more questions, use these links:

7 views0 comments

留言


bottom of page