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Looking Under The Hood At Growth And Value

February 26, 2021

From the desk of Steve Strazza @Sstrazza

We’ve been vocal about the strong internals supporting the rally in US Equities.

We've pounded the table about one historic breadth reading after the next as they’ve continued to pop up in a variety of the major indexes and sectors since early last summer.

This seemingly constant influx of extreme readings is not something we see very often... if ever.

For example, the NYSE and Nasdaq recently registered the most new highs in history on a combined basis.

The bottom line is breadth has been overwhelmingly bullish and is one of the main reasons we're in the camp that this is likely the early innings of a new cyclical bull market.

We're also in the camp that the recent rotation into value and out of growth is more than just a counter-trend development at this point.

We've been watching this relative trend reversal unfold and discussing it since last year. Although it hasn't been until more recently that we've fully embraced the theme and decided we want to be leaning on the worst long-term laggards of all, like Energy and Financials.

In this post, we'll take a quick look under the hood and see whether internals support the recent breakouts from these two value sectors.

Then we'll take a quick look at the Nasdaq 100 and discuss the deterioration in breadth we're seeing from large-cap growth stocks.

If you read our research you're probably sick of hearing this by now, but that's good because it's important! The Large-Cap Financial SPDR $XLF recently reclaimed its pre-financial crisis highs after 14-years of zero progress.

Here's a look at the XLF daily chart in the top pane along with the percentage of new 52-week highs in the bottom pane.

The last time so many large-cap Financial stocks were making new 52-week highs was over 3 years ago.

This kind of initiation thrust is a common characteristic of early-stage bull markets and is strong confirmation of the massive base breakout that just occurred in Financials at the Sector level.

Remember, new highs are never bearish. And an expansion in new highs, like we're seeing now, is especially bullish.

It's when these readings show an absence of or contraction in new highs that we want to pay attention. But, that's simply not the case for these sectors today.

Now let's move to Energy. About a month ago, we wrote about some early signs of health beneath the surface.

Back then the sector just experienced its highest percentage of new 6-month highs reading in over a decade and we suggested that "Energy stocks could be gearing up for a new cyclical bull."

Fast forward to today and similar to Financials, the space has continued to perform very well the past month. It's even taken on a significant leadership role over the short and intermediate-term as the rotation into value accelerates.

The Large-Cap Energy Sector SPDR $XLE recently made new highs and we've been buying Energy stocks to take advantage of the newfound strength from these former laggards.

I can't think of a more bullish way for a breakout at the sector or index level to be confirmed than seeing it accompanied by a thrust in the percentage of new 52-week highs from its components.

That's exactly what just took place with both large-cap Energy and Financial stocks this week.

If these breakouts are valid, as current evidence strongly suggests they are, then this rotation into value could have some real staying power this time around.

What's more, is on the other side of this relationship we have growth losing momentum and showing relative weakness. To make matters worse, we're now starting to see breadth deterioration beneath the surface too.

Surprisingly enough, one of the indexes that did NOT experience bullish initiation thrusts during its rally off last year's low was the Nasdaq 100 $QQQ.

This is likely because of the fact the bar was already set so high for this index due to its strong performance in years prior.

Regardless of the reason, unlike indexes that did experience thrusts, we’re paying attention to divergences in many of the Nasdaq’s breadth indicators*.

When we consider these breadth developments in addition to the fact that the Russell 1000 Growth $IWF vs Value $IWD ratio just violated our line in the sand slightly beneath 1.70, it seems like the perfect storm is brewing for a structural trend reversal.

As long as we’re below this critical level, we have to be overweight value… at least, on a large-cap scale.

If you look at the sector breakdowns in the chart inserts above you'll notice the main sectors that drive this relationship are Technology and Financials.

  • Growth has a 55% allocation to Technology while only 2.5% of the fund is in Financials.
  • Value is dominated by Financials, with a 25% weighting.
  • Value has a significantly higher weighting in Energy and Materials than growth which has basically no exposure to these sectors.

For this reason, we like to watch the Technology vs Financials ratio for insight. Here's what it looks like right now.

We're at a key inflection point as the chart looks ready to pick a direction any day now.

We’ll continue watching these sectors (particularly Tech and Financials) as well as the internals underlying them closely for clues as to the future direction of the growth vs value trend.

For now, the data continues to build in favor of value while money flows out of tech and growth... and we've repositioned ourselves accordingly to take advantage of it.

Do you think we're playing this right?

Are these historic readings enough to make you want to buy these secular laggards?

After almost a decade and a half of leadership, are growth's best days behind it?

Let us know what you think!

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Allstarcharts Team

P.S. Premium Members, be sure to check out the breadth charts in this post as well as hundreds of others on our chartbook page.

*We encourage you to watch this Happy Hour With Traders Video where we have an in-depth discussion of how to properly analyze these breadth indicators. It's packed with information from some of the best Technicians in the business!