Edge Chart User’s Guide

The early development of my Relative Strength Momentum (RSM) sector rotation model took place in the mid-1980s.  The ranking system proved a valuable tool over the years, and the computer printout format served its purpose – identifying the sectors and groups with an edge.

If a picture is worth a thousand words, then a well-designed chart or graph should be worth at least a few data tables.  Graphical techniques, when used appropriately, can significantly improve our understanding of information, versus the traditional tabular format.

That led me to the development of the Edge Charts, which are market momentum snapshots.  They are a quick and easy way to get a handle on the overall state of the market.  With a glance at one chart, you can assess both the relative strength and absolute strength of more than 30 global equity market segments.

Reading an Edge Chart is very easy, once you know how.  Let’s use the Sector Edge chart below as an example.  First, the numbers and bars on the chart represent the RSM values, which is my measurement of absolute strength based on intermediate-term momentum.  The values are annualized to give you a better feel for what they represent.

The Sector Edge

Near the bottom of the chart is the Financials sector with a value of -17, which implies that if its intermediate-term trend were to continue for the next year, it would decline by about -17%.

The relative strength of each sector can be determined by the ranking.  In this example, the Energy sector is stronger relative to the Financials sector, but both are weak (negative) on an absolute basis.  Sectors with positive intermediate trends are readily identified by their green color and positive RSM value.  Likewise, sectors with unfavorable trends have a red color and a negative number.

The 10 sector readings represent the 10 GICS sectors of the U.S. stock market.  I chose GICS simply because it is the most widely accepted classification system.  I added an 11^th category (Sector Avg), which is an equally weighted average of the 10 sectors.

The Style Edge

The example here indicates mildly bearish market conditions with the majority of the categories in slightly negative trends.  Mid Cap Value is the strongest style on a relative basis, but on an absolute basis it is only mildly bullish.

The Global Edge

The 11 global segments consist of five important single country markets (USA, Japan, UK, Canada, and China), three regions (EU, Latin America, and Pacific excluding Japan), and three broad-based categories (EAFE, Emerging Markets, and World Equity).

I apply the same momentum calculation methodology across all three groupings (Sector, Style, and Global), making it easy to compare global regions to U.S. sectors.

Lastly, it is important to know that the calculations are based on U.S. listed Exchange-Traded Funds (ETFs).  This has two important ramifications:  1) they represent actual investment vehicles, not indexes, and 2) it assumes you are a U.S. based investor with all currencies translated back into U.S. dollars.

About the RSM Values

The RSM readings can take on any value, although there are practical limitations.  The reading for a money market fund is typically equivalent to its yield.  Equity readings between -10 and +10 usually indicate weak or changing trends.  Values greater than 25 are usually considered strong.  Very large values, whether they are positive or negative, typically represent momentum spikes that are not sustainable.  The Technology sector saw extremes of about +200 in 1999 and -200 in 2002.

I update these charts every week and distribute them to subscribers of Invest With An Edge newsletter, a free publication that you can receive by signing up here.