Month: September 2019

Short answer: No, not yet.

There’s been barrels of digital ink spilled on the topic of whether the relationship between growth and value stocks has shifted. Ahead of the snap in relative performance I wrote in my Thrasher Analytics letter that there was a risk we’d see a shift favoring value stocks due to the daily ratio chart and the stretched relative performance the ratio was experiencing. By no means did I expect the move to be that quick and severe.

While the move was large, did it truly end the reign of growth stocks? Let’s look at the chart.

Below is a weekly relative performance chart of the two popular Invesco S&P 500 Growth and Value ETFs ($RPG and $RPV). When the line is rising, that means RPG (growth) is outperforming RPV (value). For the last several years the ratio has been in a wide range with a ceiling around 1.8 (red horizontal line on the chart below). When growth stocks lead value up to this point, we saw a shift in leadership favoring value. That was until we saw a breakout in the ratio earlier this year when growth stocks took things up a gear and set a new multi-year high in the ratio between RPG and RPV.

When another period of rotation happened. And it caught a lot of traders by surprise by just how deep the move occurred. In fact, we’ve only seen two previous 1-week shifts in relative performance favoring value since 2010 (bottom panel). What’s noteworthy of the previous two major dips was that they occurred near the start of new intermediate-term trends favoring value: September 2011 and February 2016. But they also occurred when the broad market was experiencing double digit corrections, with the last pain point being the bottom falling out for growth stocks and the resulting move higher in the market, which ultimately favored value stocks for a period of time.

This time around we aren’t in a broad market decline, instead we’re just a few whispers of an all-time high, so I’m not completely sold on the idea we can make a fair market comparison to ’11 and ’16 just yet.

Now let’s look at the data on the right of the chart, the latest price action for the ratio of RPG and RPV. The move lower took the ratio right to 1.8 intra-week (not shown by the line chart, but trust me or look at an HLC version of this chart) and stopped. Then we saw growth take back control and move the ratio higher. This all took place with momentum (top panel) remaining in its bullish range. While the daily chart of the ratio shows a bearish divergence in momentum, the weekly chart does now. Instead, we didn’t even see the RSI reach the prior lows set in 2017 and 2018.

Therefore I think it’s still too premature to put a fork in growth’s leadership and call it done. The trend remains above the breakout point and momentum is holding on to its bullish range. Neither of these two points are bearish for growth’s up trend in relative performance. Now if we do experience another round of bearish pressure for the ratio and we get a solid close under 1.8 on the weekly chart with momentum until to hold above the ’17/’18 low then we may in fact see a larger-term shift in leadership. As always, I wait for price confirmation.

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.

Let me begin by apologizing for the lack of content on the blog. I share a great deal on Twitter/StockTwits and have been focusing on the charts and commentary I publish at Thrasher Analytics. But that doesn’t mean I forgot about this blog! So with that, let’s dive in…

Equities have been trending higher after breaking out from their multi-week consolation with the S&P 500 nearing its prior summer high. Several breadth, momentum, and risk appetite indicators have done a nice job confirming the trend along with some participation by small caps and financial stocks which seemed like they had been left for dead as Treasury yields put a choke hold on their trend. There’s a set of two indices that have caught my eye recently that have not been doing a great job confirming the bullish price action in U.S. large caps though: Value Line Indices.

The Value Line indices were originally created in 1961 and represent over 1,700 publicly traded stocks from the NYSE, Nasdaq, Toronto Exchange, and American Stock Exchange. The Value Line Geometric Index is equally weighted and due to the size of the coverage, can provide excellent insight into the equity market that may not be shown by the more popular indices.

Typically, both Value Line indices track the large cap S&P 500, which means when they diverge we want to pay attention since it doesn’t happen very often. We last saw a divergence when the S&P 500 made a higher-high last October with both Arithmetic and Geometric Value Line indices making lower-highs, which is also what many other breadth and market gauges were showing at the time as participation in the up trend narrowed severely while volatility also contracted to historic levels. Stocks then began to confirm the weakness and we had the Q4 down trend.

As the S&P 500 bounced in December of last year and went on to set a new all-time high, Value Line indices have continued to make lower highs, not nearly showing the same degree of strength. What’s telling about this divergence is just how long its lasted. With each new high in the SPX, the Value Line indices have gone lower and lower – even setting a lower-low under the prior April level with the most recent dip in stocks.

So now what? Well, let’s look at two other divergences in the Value Line…

If we go back a little further in history we can see two previous divergences, both with very different outcomes. First, 2011-2012. Stocks produced a double-digit decline in 2011 but when the S&P 500 recovered it did not immediately see confirmation in the Value Line indices. This divergence was concerning but eventually resolved itself to the upside and the Value Lines eventually began to confirm the price action in the $SPX. The second divergence takes us back to 2007. Do I say more? The S&P made a higher-high but we saw lower-highs in Value Line – and you know what happened after that.

So which scenario are we going to see play out this time? Will the divergence in the broad focused, 1,700+ stock Value Line indices fix itself and begin tracking with the large cap equity index once again or are we in for something more severe? Time will tell. Right now I’m not seeing other major breadth divergences to the degree we had in 2007 which is a good sign! I’m keeping an open mind and always looking for where the greatest degree of risk is within the financial markets. I’d like to see the Value Line indices break above their most recent prior highs, marked by blue lines on the first chart. That would be a great first step in getting back to confirming what the other major equity indices are doing.

This weekend we had the Iranian attack on Saudi Arabia and the FOMC announcement on Wednesday, so needless to say there’s plenty for the market to focus on and designate importance and use as a catalyst for the next leg higher or lower from here. This topic is the focus of what I cover over at Thrasher Analytics.

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.