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Stocks, ETFs, and Equities Macro · Sector Rotation and Macro

Reading relative strength of sectors

Use ratio charts and relative rotation graphs to identify which sectors are leading and lagging.

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Stocks, ETFs, and Equities Macro

Sector Rotation and Macro

Lesson 33 of 5560%
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Lesson 33 of 55Stocks, ETFs, and Equities MacroSector Rotation and Macro

Today's tiny win: make one idea click.

Use ratio charts and relative rotation graphs to identify which sectors are leading and lagging.

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The ratio chart: your sector x-ray

Relative strength is the single most useful tool for spotting sector leadership in real time. The idea is simple. Instead of looking at a sector's price alone, you compare it to a benchmark — usually the S&P 500. If the sector is rising faster than the index, it is leading. If it is falling slower than the index, it is still leading on a relative basis. If it is doing the opposite, it is lagging. One ratio. Everything you need to know about whether a sector deserves your money right now.

How to build one in TradingView. Open a chart. In the symbol box, type the sector ETF divided by SPY. For example XLF/SPY or XLE/SPY or XLK/SPY. The chart you get is a pure leadership chart. Trendlines, moving averages, and breakouts on this ratio mean the same as on a regular price chart — but the signal is relative outperformance, not absolute price. When XLF/SPY breaks out of a base, the financial sector is starting to lead. Most professional traders watch a panel of these ratios constantly.

Wick points at a chalkboard showing the market down 20% and a sector down 8%, teaching that relative strength compares a sector to its benchmark.Falling but leadingMarket: -20%Sector: -8%Sector is leading
Wick saysA sector can fall and still lead. Down 8% in a market down 20% is winning.

Relative rotation graphs — RRGs for short — take this idea further. They plot every sector on a two-axis chart. The X-axis is relative strength against the benchmark. The Y-axis is the momentum of that relative strength. The chart is divided into four quadrants. Leading is top-right. Weakening is bottom-right. Lagging is bottom-left. Improving is top-left. Sectors usually rotate clockwise through these four quadrants over months. RRGs are available in TradingView and on stockcharts.com.

Wick walks a road from Improving to Leading to Weakening with a finish at Lagging, showing the usual path sectors take around a relative rotation graph.ImprovingLeadingWeakeningLagging
Wick saysOn a rotation graph, sectors often move clockwise: improving, leading, weakening, lagging.

Combine relative strength with breadth. Breadth is how many stocks inside a sector are participating in the move. If XLF is leading but only 3 of its 70 stocks are above their 200-day moving average, the leadership is fragile. If XLF is leading and 50 of 70 are above their 200-day, the rotation is broad and likely to persist. The advance-decline line for each sector is the cleanest breadth metric. Strong rotation needs both relative strength and breadth on the same side.

Wick checks a clipboard: ratio breaking out and 50 of 70 stocks above the 200 day are ticked, while only 3 of 70 gets a red X, teaching to confirm leadership with breadth.Strong rotation?Ratio breaks out50 of 70 above 200dOnly 3 of 70 above
Wick saysReal leadership needs breadth too. If only a few stocks carry a sector, the move is fragile.

Recap: divide a sector ETF by SPY for the cleanest leadership signal. Use RRGs to see all sectors at once. Confirm with breadth so you do not chase fragile moves.

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1. XLE is up 2 percent and SPY is up 5 percent over the same month. The XLE/SPY ratio is...

2. On an RRG (relative rotation graph), the LEADING quadrant is...

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