Stocks rise in groups
In lesson 3 you learned to check the market first. This lesson is the next step down: the sector.
Stocks rarely move on their own. When the outlook for banks improves, most banks rise together. When a new law or a spending program favors a group, such as chipmakers or defense contractors, the whole group re-rates at once. And the biggest buyers in the market, such as mutual funds, pension funds and insurance companies, usually decide how much to put in each sector before they decide which stocks to buy.
Stan Weinstein's advice follows from that: a Stage 2 stock in a strong sector has two tailwinds. The same stock in a weak sector is swimming against the current, and most of its neighbors will pull it back.
Money rotates; it rarely leaves all at once
Even in a falling market, money doesn't vanish. It moves: out of sectors whose best days look behind them, into sectors whose prospects are improving. That movement is sector rotation, and you can watch it happen in our records.
Jun 2020: Health Care 55% · IT 51% · Financials 14% · Energy 4%
Nov 2020: IT 56% · Financials 45% · Health Care 41% · Energy 7%
Jan 2021: Financials 89% · Energy 80% · IT 78% · Health Care 55%
Look at the end of July 2020. The market was still shaken: in energy, fewer than one stock in ten was in Stage 2, and in financials about one in five. But more than half of tech and health-care stocks already were. That was the money telling you where it was going.
Today's sectors
Here is the same measure for every sector, today. The number on the right is how much it has changed in the last four weeks, often more useful than the level.
- Energy56%−10
- Information Technology42%+4
- Health Care38%−8
- Communication Services29%−6
- Consumer Staples28%−1
- Materials28%−9
- Financials24%−29
- Industrials21%−7
- Consumer Discretionary19%−8
- Utilities11%−4
- Real Estate10%−2
A sector near the top with its number rising is where the wind is strongest. A sector near the bottom that has started climbing is worth watching: that is often how new leadership begins.
The rotation graph, in plain words
Rotation has a shape, and one chart captures it well: the relative rotation graph, or RRG. It places every sector against the market on two simple scales:
- Left to right: strength. How the sector is doing compared with the market. Right of center: beating it. Left: trailing it.
- Bottom to top: momentum. Whether that strength is gaining or fading. Above center: gaining. Below: fading.
That splits the chart into four quadrants, and sectors tend to travel through them in a clockwise circle:
| Quadrant | Where | What it means |
|---|---|---|
| Improving | top left | Still weaker than the market, but gaining. Often where new leaders come from. |
| Leading | top right | Stronger than the market, and still gaining. The strongest place to be. |
| Weakening | bottom right | Still stronger, but losing momentum. Leadership may be ending. |
| Lagging | bottom left | Weaker than the market, and still losing. Avoid. |
Here is today's graph. Each sector's trail shows where it has been over recent weeks, so you can see which way it is moving as well as where it is.
Nothing selected — the graph is empty. Tick a sector above.
How to use it
Put the two views together and you have a simple shortlist:
- Start with the market: is it helping? (Lesson 3.)
- Find sectors that are Leading or Improving on the rotation graph.
- Keep the ones where the share of stocks in Stage 2 is high or rising.
- Drop sectors in Lagging with a falling share, however cheap they look.
- Look for stocks only inside the two or three sectors that survive.
Every US sector and industry, ranked by strength and by how many of its stocks are in Stage 2, updated after every close, with the rotation graph one tap away.
Questions people ask
What is sector rotation?
Sector rotation is money moving from one group of stocks to another: out of sectors whose best days look behind them, into sectors whose prospects are improving. It rarely leaves the whole market at once, so some sectors are usually rising while others fall.
What is an RRG chart?
A relative rotation graph plots each sector against the market. Left to right shows how strong the sector is compared with the market; bottom to top shows whether that strength is gaining or fading. Sectors tend to move around it clockwise, which is what makes it useful for spotting rotation early.
What do the four RRG quadrants mean?
Leading (top right): stronger than the market and still gaining. Weakening (bottom right): still stronger, but losing momentum. Lagging (bottom left): weaker than the market and still losing. Improving (top left): still weaker, but gaining, and often where the next leaders come from.
Is there a fixed order in which sectors lead?
Textbooks describe a typical order through the economic cycle, but real markets don't follow it neatly. In 2020 health care and tech led first, then consumer and industrial stocks, then banks and energy after the first vaccine news. Read what the data shows now rather than a textbook sequence.
Can a sector be 'leading' and still fall?
Yes. Rotation is relative: a sector that falls 5% while the market falls 15% is leading. That is why we read rotation together with how many of the sector's stocks are actually in Stage 2.