Relative Rotation Graphs, Market Rotation Visualised

Benzinga

Todd Gordon, Founder, Inside Edge Capital and TradingAnalysis.com hopped on with Benzinga's Premarket Prep team to show his Relative Rotation Graphs which help you visualise market rotation.

Transcript

00:00So, what we're doing here is I'm looking at a few different things. So, this is rates,

00:04this is US 10-year yield in orange, and this is the value growth ratio in blue. And as

00:10you can see, in 2016, 17, 18, we had US yields dropping, value growth ratio declining, which

00:19means value underperforms growth, growth outperforms value. All of a sudden, we got 21, 22, you

00:26know what happened there, inflation explosion, we got a good rotation into value, right?

00:31Because value growth in blue is moving up as rates are going up, right? The valuation

00:36question with higher rates makes it hard to want to hold tech stocks, you know, with the

00:40promise of big profits down the road. Well, all of a sudden, we got value growth sell

00:45back down, and we're at this triple bottom here. Rates, 10-year yields are trying to

00:50decide what to do. So, as this long-standing relationship, is it trying to divorce itself

00:57and diverge? Are we going to get a break of this triple bottom of value growth, which

01:02means growth is further to the right, and you can see these things rotate around the

01:07corner. As you're moving in a clockwise fashion, growth is outperforming value. This is the

01:12monthly on the left. Here's the weekly. This is the last six, seven, eight, nine weeks.

01:18If we could get a hook back in growth this way, value, which is in green, goes this way,

01:24it's probably going to decide the fate of this triple bottom value growth ratio that

01:29goes back to the pandemic. And if you break down there, it probably means growth is going

01:35to continue to outperform. The market is going to deal with, you know, four, four and a half

01:4110-year yields. The real yield is call it two, two and a half, two, seven, five, and

01:46the economy can go on and do business on that because our real rates are still what

01:50they were five years ago, two, two and a half percent, but we'd have an inflation back there.

01:54Companies can invest, companies can borrow. And I think, you know, with Nvidia coming

01:59up, I think earnings have been awesome. I think the AI revolution is very much here.

02:05You know, I think that that triple bottom breaks and we get a clear rotation back into

02:09growth. And I think, you know, the hedge that I didn't finish my point on the S&P, you know,

02:17we can go put a 5,500, 5,000 SPX put spread on in January, February. I think it was like,

02:24I don't know. So it's a 500 point spread. You can put it on for 40, 50 bucks, you know,

02:30so it's, you know, you're risking 50 to make 450. So even if there's a 30, 40% chance of

02:37needing that hedge based on everything that I just said, you know, I know we want to get

02:42into specific stocks, but like, I'm willing to take that high reward, low risk hedge for

02:48our clients, but also put ourselves in the position that Nvidia could be 160, 170 bid

02:54after they come out and report what? 50 billion in earnings? I don't know. What do you think

02:59they're going to put up there? So like, I want, I'm still very bullish. I think the

03:04hopefully if this election isn't a train wreck, we can get through it, focus on how

03:09hawkish or dovish the Fed is, and it's back to business.

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