From the desk of Steve Strazza @sstrazza
Welcome to our latest RPP Report, where we publish return tables for a variety of different asset classes and categories along with commentary on each.
Looking at the past helps put the future into context. In this post, we review the absolute and relative trends at play and preview some of the things we’re watching to profit in the weeks and months ahead.
You can consider this our weekly state of the union address as we break down and reiterate both our tactical and structural outlook on various asset classes as well as discuss the most important themes and developments taking place in markets all around the world.
While the weight of the evidence remains in the bull's favor, we continue to see more data arrive that suggests the environment could be shifting toward one that is less conducive to risk assets, at least over shorter timeframes.
In fact, we'd argue that bears have more talking points today than they've had at any time over the trailing year. With each passing week, data continues to suggest a more cautionary approach is appropriate.
Shorter-term, the market looks increasingly messy. Defensive assets have stabilized at logical levels of support and are beginning to outperform. Meanwhile, a growing number of stock market indexes and other risk assets are achieving our upside objectives and/or running into critical areas of overhead supply.
Additionally, we're seeing a growing list of red flags in our intermarket and cross-asset ratios, many of which are diverging from the broader averages.
As far as breadth and internals are concerned, the data remains bifurcated. Growth areas that have been under pressure are showing cracks beneath the surface. At the same time, value and cyclical areas of the market just printed fresh bullish initiation readings last week.
You need to be mindful of what you own in this environment. It can make all the difference.
We continue to see mixed signals from most asset classes. But the scale is tilting further toward the bear camp. For now, the current backdrop continues to support our view that markets are likely to remain messy for the foreseeable future.
But don't forget -- from a longer-term perspective, the corrective action in many of these risk assets is nothing more than healthy consolidation within ongoing uptrends.
With that, let's jump into this week's report with our US index table:
The rotation out of growth stocks and into value is illustrated by the substantial outperformance from Dow Transports $DJT over all timeframes, as well as the weak performance from the growth-heavy Nasdaq 100 $QQQ over shorter timeframes.
One theme we've been pounding the table on all year is that many intermarket relationships and relative trends boil down to their exposures to growth vs value -- and further even, technology vs financials.
The Nasdaq vs Dow $DIA is a shining example of this trend at the US Index level. Here is the chart, zoomed out about two decades:
The Nasdaq just happened to reverse lower relative to the Dow at the exact same level where this ratio peaked during the dot-com bubble back in 2000. There couldn't be a more logical place to see the Dow finally outperform its mega-cap counterparts after almost 20-years of lagging. Nothing lasts forever, right?
We decided to look into this a bit deeper in order to see just how much of this reversal in fortune is being driven by the growth vs value relationship just mentioned. Here is a table of all the Dow 30 components along with their weightings and trends over various timeframes:
Compared with its peer indexes, the Dow Industrial Average has a far higher weighting toward value sectors like Industrials, Financials, Materials, and Energy. In fact, unlike the S&P and Nasdaq, the Dow has more exposure to value than growth stocks, with 41% and 34% weightings in each factor, respectively.
The Nasdaq 100, on the other hand, is comprised of roughly 84% growth and has less than 3% value. Here's a look at its components: 
This certainly helps explain the recent weakness from this mega-cap growth index... on both absolute and relative terms.
Now let's focus on the trends of the various components in these indexes. 60% of Dow components are in a bullish short-term trend. And looking out further the strength is even more broad-based with over 75% in a bullish intermediate-term trend and 90% in a long-term uptrend.
The Nasdaq looks much different when we look at its individual constituents. Instead of 60% being in a bullish short-term trend like the Dow, 60% (or 60 of the 100 Nasdaq 100 stocks) are in a bearish trend. Over an intermediate timeframe, only about 40% are in an uptrend, compared with nearly 80% for the Dow.
Considering what we're seeing under the hood from these indexes, we think this topping formation breaks lower and we finally get some sustained outperformance from the Dow in the coming quarters... even years.
Here is the same chart, just zoomed in to show more recent price action. We've also overlaid the growth vs value ratio to show just how closely the two move together:
The bottom line is all signs point to this ratio moving lower for longer. The 0.95 level is the line in the sand, just like 1.70 is for growth/value.
We can't be clear enough... This is not just a tactical trend. The value over growth theme is here to stay, and that means relative strength from the Dow, as well. Position accordingly.
Here is our Factor ETF table now. It does a fine job of illustrating this rotation out of growth and into value and other factors like High Beta $SPHB recently.
Notice how Russell 1000 Growth $IWF is the only ETF that is lower over the trailing month and quarter. The relative weakness from these stocks is no joke.
What does this mean for US Sectors?
Well, the story is no different here. Look no further than the leaders in the table above to see it.
Notice the extreme outperformance from the cyclical sectors ($XLI, $XLF, $XLE, $XLB) over any meaningful timeframe? With the exception of Energy, these sectors have posted 70% - 80% returns over the trailing year. And when you zoom all the way out to the COVID lows, these figures are downright unbelievable.
Take Industrials $XLI for example, which are up about 120% over this time period. Here's the chart:
Price is currently trading just off all-time highs as it digests these monstrous gains above our primary objective around 100.
This leads nicely into another theme we continue to see more and more of lately: major indexes and averages, both the US and abroad, are running into logical levels of overhead supply at our price targets or simply key resistance at former highs. The list goes on and on. In reviewing our sector universe this weekend, among large-caps alone, we have Health Care, Financials, Real Estate, and Discretionary all achieving upside objectives along with Industrials.
Even the equal-weight S&P 500 $RSP -- one of the most important indexes of all -- is currently at its primary target from last year's drawdown.
And this action isn't at all unique to US markets.
Now let's look at some examples of major international indexes that are also running into significant resistance.
