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Relative Rotation – Unlocking the Hidden Potential Part 1

Investors seeking to optimize their portfolio returns through bull and bear markets have various options. For instance, they can shift asset allocations…



Investors seeking to optimize their portfolio returns through bull and bear markets have various options. For instance, they can shift asset allocations to and from stocks, cash, or other asset classes based on perceived risk and valuations. Hedging is another popular alternative. At times, options trades, short positions, and inversely correlated assets like bonds can provide stability during bear markets and peace of mind when bull markets get long in the tooth. Lastly, there is relative rotation.

Relative rotation, which can and should be employed with other tactics, entails shifting between different stocks, sectors, and stock factors. The strategy can add significant value to portfolio management if done well.

Part one of this article defines relative rotation and presents charts that will stun you, as they did ourselves. Part two will share our proprietary relative rotation models and tools we offer SimpleVisor subscribers. These tools allow you to spot relative rotation opportunities and take advantage of opportunities that are not well followed. 

While this article focuses on two equity factors and their associated ETFs to highlight the value of relative rotation, the concepts we introduce equally apply to individual stocks and sectors.

Key Takeaways

  • What is relative rotation?
  • The absolute performance of a pair of stocks, sectors, or factors can be deceiving.
  • The relative performance of the same two securities can vastly differ from their absolute performance.
  • A trading example using relative rotation.

Relative Rotation

Individual stocks, factors, and sectors constantly move in and out of favor.

During the equity downtrend of 2022, energy and dividend value stocks outperformed the markets, while technology and consumer discretionary stocks were among the worst performers. This year, large mega-cap stocks, including technology and discretionary stocks, are taking the market higher. Most other stocks, sectors, and factors are underperforming the S&P 500.

The Finviz heat map below shows a handful of stocks in bright green that are almost solely responsible for this year’s gains in the S&P 500. Most of the other stocks, as displayed in the shades of red, are flat to lower. As evidence, the equal-weight S&P 500 is lagging behind the weighted S&P 500 by 11% year to date. The second graph from Trahan Macro Research shows that the S&P 500 would be flat for the year without its top ten stocks.

market breadth sp 500

To further highlight the recent extreme rotations we wrote the following in a recent Daily Commentary. Subscribe to get it emailed daily for free!

The graph below puts the wide divergence of May’s monthly index returns into context. To construct the chart, we took monthly performance changes for the Nasdaq 100, S&P 500, and the equal-weighted S&P 500 and calculated the performance difference for each combination of the two indexes. For instance, the largest performance gap in May was 11.69%. That comprises the Nasdaq, up 7.42%, and the equal-weighted S&P 500, down 4.27%. The 11.69% difference is a four-standard deviation (sigma) move! The average sigma of the three relationships (black) is the highest in at least 20 years. The only other time we witnessed divergences anywhere near May’s magnitude was in March 2020, when the pandemic wreaked havoc on markets.

strategy index return deviations

Relative rotation to mega-cap tech stocks from almost all other stocks, sectors, or factors would have significantly improved your returns this year, even if your overall allocation to stocks was reduced considerably.

Visualizing Absolute Performance

The graph below charts the prices of the mega-cap growth ETF MGK and the high dividend yield ETF VYM. Besides the last few months and other short instances, their prices correlate well.

stock prices vym mgk

The following graph confirms what our eyes see. The scatter plot compares daily price changes for the two ETFs since 2018. The R-squared is statistically robust at .6073. Further, the 45-degree slope of the trend line indicates that we should expect daily percentage changes for the ETFs to be similar. 

correlation vym mgk

Despite the visual and statistical correlation between VYM and MGK, there are vast differences in performance. Since 2018, VYM has been up 39%, while MGK has risen by 100%. The S&P 500 is up about 68% over the period. The returns do not include dividends.

The graphs above fail to show stark relative performance differences between the two ETFs.

Visualizing Relative Rotation

The following graph, which highlights the value of relative rotation, is stunning. It compares the relative prices of VYM and MGK. To make them relative, we calculate the ratio of the price of each ETF to the S&P 500 (SPY).

performance relative rotation mgk vym

The two lines are mirror images of each other. Below we present the same data but with the MGK axis on the right-side inverse. Again, the correlation is spectacular. Two ETFs that travel on similar paths have entirely different performances compared to the broader market.

vym mgk relative performance graph

Trading a Relative Rotation Strategy With VYM and MGK

Understanding that relative relationships can look vastly different than price trends is the critical first step in allowing investors to take advantage of pairs of stocks, sectors, and factors that exhibit strong inverse relationships. In this case, and with the benefit of hindsight, an investor could easily have outperformed each ETF and the S&P 500 by switching between MGK and VYM at various points.

To help appreciate the potential outperformance, the graph below assumes we only held MGK during the periods shaded blue and VYM during the beige-toned period.

The second graph shows the cumulative returns of the strategy, which only executed three trades in five years. We could have increased the number of transactions and improved the returns, but we kept it simple.

relative performance vym mgk rotation trading strategy
rotation strategy returns
return performance table vym mgk spy

The summary table above highlights that the Sharpe Ratio, measuring return per unit of risk for the rotation strategy, is nearly double that of the three ETFs.

In our example, we cherry-picked two ETFs with a robust and durable negative relative relationship. In practice, investors should prefer several pairs of securities.


Relative stock, sector, and factor rotation can be meaningful sources of returns. It allows an investor to run with the bulls and protect from the bears more efficiently.

In hindsight, as in our example, knowing when to rotate from one holding to another is simple. In the real world, statistical relationships between pairs change over time. Further, the relative returns of pairs with strong inverse relationships do not necessarily normalize because they are statistically very extended. For these and other reasons, it can be challenging to know when to rotate and what to rotate into and out of.

While difficult, it’s not impossible. Having the right tools that measure relationships, track their relative returns, and allow for technical analysis of the relationship can make the task manageable.

In part two of this article, we present our relative rotation proprietary tools that are currently privy to subscribers of SimpleVisor.

The post Relative Rotation – Unlocking the Hidden Potential Part 1 appeared first on RIA.

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I Say We’re Setting Up For A Major Bottom

It’s almost impossible to call market tops and market bottoms using basic technical analysis tools like price and volume. Don’t get me wrong, that combination…



It's almost impossible to call market tops and market bottoms using basic technical analysis tools like price and volume. Don't get me wrong, that combination is my favorite during trend-following periods. But trying to spot bearish reversals is difficult when price action keeps riding higher and higher. The same is true in trying to spot bullish reversals when prices keep moving lower and lower. Maybe that seems unconventional to hard-core technicians, but I believe it's the reality. Too many folks say "when this line crosses that line, then this will happen". To me, that's following technical analysis and wearing blinders. Just my two cents.

I use technical price action to confirm what other signals are suggesting. We get plenty of signals on a regular basis - some short-term in nature, others long-term - if we're only willing to listen. While I've been bullish since June 2022, I do recognize short-term warning signals that tell us that risks of remaining long have increased substantially. In mid-July, I turned very cautious short-term and discussed those signals in a "Your Daily 5" episode that aired on July 19th. Let me pull up an S&P 500 chart, so you can see where U.S. equities stood when I fired this warning shot:

There were several reasons for the stock market bulls to hit quicksand. Tesla (TSLA), a Wall Street darling and a favorite stock of mine, suggested a possible 20% drop. That call aired the day of TSLA's top and TSLA fell closer to 30% in less than one month. These signals work and help us to manage risk! As I always say, they do NOT guarantee future price action, but they make us aware of increasing risk and that's how you invest more successfully. Since that July top, I've encouraged our EB members to tread very cautiously, whatever that means to each individual member. To some, it's being in cash. To others, it might simply mean to avoid leverage on the long side. But this cautious period is coming to an end.

If you want to see what was discussed on July 19th and why I felt the stock market was in short-term trouble, check out the Your Daily 5 recording on YouTube!

I absolutely LOVE when my signals take the opposite view of the masses. And now that everyone believes we're resuming the prior bear market, my signals are saying HOGWASH. Could we continue to proceed lower? Sure. There are never any guarantees with the stock market. But I see signs that suggest shorting is a VERY HIGH RISK strategy, with those risks growing every day. I'm discussing one major reason why in our FREE EB Digest newsletter that will be published early Monday morning, before the stock market opens. If you're not already an EB Digest subscriber, it's 100% free with no credit card required. Simply CLICK HERE and enter your name and email address. I'll discuss Reason #1 to turn bullish tomorrow morning. And I'll also focus on other reasons to be thinking bullish thoughts when I publish the EB Digest on Wednesday and Friday. Don't wait until it's too late. Check them out NOW!

Happy trading!


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Highlights from My Week’s Reading

Natalię Dowzicky, “How Florida Beat California to High-Speed Rail,” Reason, September 20, 2023.
Not only is Brightline the first privately…



Natalię Dowzicky, “How Florida Beat California to High-Speed Rail,” Reason, September 20, 2023.


Not only is Brightline the first privately funded intercity rail line in the U.S., but it’s also the fastest train in the country outside of the northeast corridor. Topping out at 125 mph in Florida, it will travel from Miami to Orlando in about three hours. For comparison, the Amtrak in the area takes about six and a half hours to complete that same trip.

Mike Reininger, CEO of Brightline, told Reason that passenger rail makes commercial sense under specific conditions, such as the case in Florida, where it connects two populous, tourist-friendly cities that are about 250 miles apart. At that distance, Reininger says, “It is too far to drive and too short to fly. You can approximate the time of flying significantly, improve the time of driving, and you can offer it at a price point that makes it an economic proposition.”

Not surprisingly, though, Brightline has become a subsidy sucker.

Romina Boccia, “Social Security Benefits are Growing Too Fast,” Cato at Liberty, September 21, 2023.


When a Social Security‐​eligible worker’s benefits are first calculated, this worker’s past wages are indexed to bring them to the same level as today’s earnings. This is called wage indexing and is based on the growth in average wages in the economy. When the Social Security Administration (SSA) first indexes a worker’s lifetime covered earnings, it does so using the SSA’s Average Wage Index (AWI). The AWI includes all wages that are subject to federal income tax, including wages in excess of the taxable Social Security maximum payroll tax threshold.

Wage indexing gives retirees a benefit amount that reflects the increase in the standard of living over their working careers—even if they didn’t earn commensurate wages. It’s like giving workers retroactive credit for improvements in the economy, including for wage improvements among the highest income earners.

Definitely worth reading carefully.

Christopher Wilcox, “Truck This: Why I’m Leaving the Long-Haul Industry,” American Institute for Economic Research, September 21, 2023.


More recently, environmental regulations requiring manufacturers to reduce emissions gave us the diesel particulate filter (DPF), an exhaust treatment system that replaces a standard muffler. While there is no current federal mandate requiring a DPF, the filters are required by the 2008 California Statewide Truck and Bus Rule, which has incentivized many nationwide fleets to adopt them. The problem with DPFs is the filter system clogs. A lot.

When DPFs go down, trucks roll to a stop. Truckers report having to have a DPF serviced as often as every 5,000 miles, which means lots of lost productivity and stranded cargo. I’ve had four breakdowns over the past two years, and three were due to my DPF. A tow truck driver I spoke to on one of those occasions told me half of his business comes from malfunctioning DPFs. Repairs are a specialized affair, and replacements can cost up to $2,000. When my truck isn’t moving, I’m not earning. And these regulators have required that my truck stand still far too often.

Of course California is in the forefront of regulation.

Fiona Harrigan, “Biden Administration Announces New Measures to Get Migrants to Work,” Reason, September 21 2023.


Yesterday, the Biden administration announced new actions to help get recent immigrants to work, including offering almost half a million Venezuelans a status that will let them live and work in the U.S. legally for the next 18 months. The new measures come at a critical time, as labor shortages persist and cities struggle to provide for newcomers.

Certain Venezuelan migrants are eligible for temporary protected status (TPS), a designation offered to migrants who can’t safely return to their home countries due to armed conflict, environmental disaster, or another temporary safety hazard. Venezuela was first designated for TPS in 2021 due to a severe political and economic crisis perpetuated by Nicolás Maduro’s regime. Under that designation, Venezuelans who came to the U.S. before March 2021 qualified for protection; now, the status will apply to Venezuelans who arrived before the end of July this year. There are currently 16 countries designated for TPS.

If I understand the program correctly, it sounds good: let them work instead of forcing taxpayers to subsidize their living expenses. It’s win-win-win for immigrants, employers and consumers, and taxpayers.

James Herndon, “Keep the Washington Consensus,” Law & Liberty, September 21, 2023.


Despite those deliberate omissions, synergies still allowed the Consensus to exceed the sum of its parts. Opening up foreign direct investment eased privatization. Privatization enabled balanced budgets. Balanced budgets limited inflation, which encouraged foreign direct investment. The common denominators were respect and restraint: leaders had to trust that firms and citizens knew better than the bureaucrats how best to allocate their own labor and resources. That’s why the Consensus’ first beneficiary was always likely to be the poor. After all, funding for primary education and basic healthcare does far more to reduce poverty than subsidies for diesel fuel and national airlines.

In short, Williamson promoted policies that enabled sustainable growth in developing countries with respect for their autonomy and an emphasis on raising prospects for the least fortunate. The Left never forgave him.

It’s the nicest treatment of the Washington Consensus that I’ve read. Lots of good nuggets.



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Miss Universe denies link with recently unveiled coin project

The Miss Universe Organization said that there is no Miss Universe cryptocurrency or blockchain offering involved with the Miss Universe or Miss Universe…



The Miss Universe Organization said that there is no Miss Universe cryptocurrency or blockchain offering involved with the Miss Universe or Miss Universe Philippines.

The Miss Universe Organization has denied any association with the Miss Universe Coin project announced at the Philippine Blockchain Week (PBW) event held earlier this month. PBW said that they are in contact with all involved parties and will post an update soon.

Earlier this month, a project called Miss Universe Coin was announced at PBW. Donald Lim, the founder of the organization managing the PBW, said during the event that the PBW will “launch the Miss Universe Coin.” However, weeks after the announcement, the official organization behind Miss Universe has denied any association with the coin project and called it a fraud. 

Official announcement published on the Miss Universe Facebook page. Source: Facebook

On Sept. 22, the Miss Universe official Facebook page announced that the Miss Universe Organization and JKN Global Group, the company behind the pageant, are not associated with the coin project that was unveiled at the PBW event. According to the organization, it will be pursuing “all legal options with regards to this infringement.” 

“There is currently no Miss Universe cryptocurrency or blockchain offering, and these products are in no way involved with the voting or selection process for Miss Universe or the Miss Universe Philippines pageants,” they wrote.

Related: JPEX hikes withdrawal fee to almost $1K after Hong Kong watchdog warning

In a statement sent to Cointelegraph, a representative from the Miss Universe Organization claimed that the Miss Universe Coin is a "fraud," and they expect it to be further announced in other events across the globe. “We suspect that people may be planning to mention this at upcoming blockchain conferences in Dubai and Singapore. If you see it there, please do not cover, it's a fraud,” they said.

In a statement on X (formerly Twitter), PBW said that they are currently in contact with all of the parties involved and will announce an update as soon as possible. Cointelegraph reached out to the Philippine Blockchain Week but did not get an immediate response.

Magazine: Chinese billionaire’s $1B fraud charges, Kwon’s $11M bet, Zhu Su and Islam: Asia Express

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