Insights   •   Sector ETFs

Guide to Using the Sector Momentum Map

Our new Sector Momentum Map provides investors with a quantitative approach for identifying how sectors are trending relative to their US, European and World benchmarks as well as sector peers. It serves to complement the fundamental and flows data featured in our Sector Compass.

Introduction to the Sector Momentum Map

The Sector Momentum Map (‘Map’) is powered by RRG® Research (as seen on Bloomberg Terminals). We have partnered with RRG to bring this sector rotation visualisation tool to SPDR clients.

The Map features relative strength and price momentum, which can indicate emerging opportunities and risks among sectors. Spotting the rotation of sectors in and out of favour can enable investors to anticipate money flowing from one sector to another and adjust portfolios accordingly. The benefit with this tool is seeing combinations across all sectors, neatly presented in one chart.

What the Map shows

The Map is built on two relative strength metrics:

  1. The JdK RS-Ratio measures trends in relative performance. This algorithm tries to find trends in the relative performance of each sector, comparing against the trends in relative performance of the other sectors in the universe. The comparison of relative trends across a universe is not always possible with traditional relative strength metrics.
  2. The JdK RS-Momentum measures the momentum of the relative trends detected by the RS-Ratio, again in a way that allows for comparison across a universe. Because rate of change is a leading indicator, it can serve as an early warning system for potential trend changes.

How to interpret the Map

The sectors generally rotate in a clockwise fashion around the benchmark. Sectors in the top-right, or LEADING, quadrant are in a relative uptrend against the benchmark and that uptrend is being pushed higher by strong positive momentum. These sectors can be expected to outperform and could be relatively attractive for investors.

When a trend starts to deteriorate, this will be indicated by a loss of momentum, which will cause the sector to rotate into the WEAKENING quadrant. These sectors are still in a relative uptrend but their trends are losing momentum. This can be viewed by investors as a risk.

If that weakness continues, the sector will continue its rotation into the LAGGING quadrant. These sectors are in a relative downtrend against the benchmark and that downtrend is being pushed lower by negative momentum. These sectors can be expected to underperform the benchmark. The first thing that will change if there is improvement is momentum, turning from negative to positive. That will cause the sector to rotate into IMPROVING. These sectors are still in a relative downtrend but are picking up positive momentum. Investors can interpret this as a relatively attractive opportunity.

When that improvement in momentum continues, the sector will eventually rotate back into the LEADING quadrant.

Whereas the general pattern is a clockwise rotation, in very strong up or down trends a rotation can complete on one side of the chart. Thus in the case of a very strong (and reliable) uptrend, rotations from LEADING into WEAKENING and then back into LEADING are possible. Conversely, strong (and reliable) downtrend rotations are possible from LAGGING into IMPROVING and then back into LAGGING.

Toggle the settings

Investors have several options for customising what they want to see on the Map:

  • Universe: a choice of three regions available – Europe, US, World/Developed Markets. SPDR offers sector ETFs in all three regions.
  • Frequency: the chosen timeframe can affect the RS-Ratio and result in different conclusions – a weekly setting captures the long-term trend, while daily captures a shorter trend.
  • Securities: it is possible to view all or a few sectors together to aid comparison of trends or to limit the scope for a clearer image.
  • Settings: switching on Tails can allow the Map user to see where the security has moved. A history of up to 12 months is available.

Example: Snapshot of European sectors across all 4 quadrants

Figure 1 shows sectors on the move on a day-to-day basis, with the Tails indicating the direction of travel over the previous 2 weeks. Energy stands out as a sector with high relative strength and positive momentum (albeit slowing).

Example: Rotation of European Financials (on Weekly View)

Figure 2 shows the rotation of European Financials from late October 2020 to early March 2021, set on a weekly basis. The starting point is in the LAGGING sector. During November the sector demonstrated a turnaround in relative strength from negative to positive, moving into the IMPROVING quadrant. A few weeks later it rotated into the LEADING quadrant as relative strength picked up. Finally, the rotation of the sector downwards within the LEADING quadrant reflected a loss of momentum for several weeks, although the relative uptrend was still in play.

To use the Sector Momentum Map, please click here .
To learn more about our broader sector ETF capabilities, please click here .