From the desk of Steve Strazza @Sstrazza and Grant Hawkridge @granthawkridge
One of the most important themes these days is the rotation between growth and value stocks. Groups like energy and financials have been breaking to new highs while growth and tech indexes have come under serious pressure.
So far, 2022 has been a true tale of two markets.
While cyclicals and value stocks appear to be gearing up for a momentous year, it looks like the party is finally coming to an end for the growth trade.
We want to lean on the value-heavy leadership groups for long opportunities in 2022. As for growth, we think it’s likely to remain messy as interest rates continue to rise.
When we look beneath the surface at growth and value stocks right now, our breadth data is confirming the action we’re seeing at the sector level.
Let’s dive in and discuss…
Here’s one way to visualize the opposing paths of large-cap value and large-cap growth right now. This indicator shows us the percentage of stocks above their 50-day moving averages for each of these indexes:
Look at that ramp-up in participation from large-cap value stocks since December. The metric went from 20% to 70% in just over a month.
On the other hand, large-cap growth looks quite different, as we’ve seen the number of stocks above their 50-day moving average fall from about 70 to under 40 in recent months.
It’s also worth noting that there’s been a persistent deterioration in this metric throughout most of 2021. So the writing was on the wall for the current downturn in growth stocks.
If we take a more granular approach at breadth analysis, our new highs table clearly shows the strength from energy and financials:
It’s not just our new highs scans. We’re also seeing financials and energy dominate all of our bottom-up scans in recent weeks.
And when we look at new lows on either absolute or relative terms, it’s the same story.
Weakness from growth sectors and strength from value sectors — particularly financials and energy. This is simply the market we’re in right now.
Investors have two options. They can overthink the intermarket implications and complain that growth stocks can’t seem to find a floor. Or, they can simply rotate into the groups that are working.
We think the latter is much easier. You’ll probably sleep better at night, too.
For now, our breadth analysis is confirming the price action at the sector level. While nothing looks good in the growth space, it’s all bullish for energy and financials.
One thing we’re keeping a close eye on is for participation to broaden out to the other value sectors like materials and industrials.
We’re not really seeing it yet. Here’s a look at the percentage of stocks above their 50-day moving averages for each of the value sectors:
Energy has an impressive 95% of stocks above their 50-day moving average, closely followed by financials at 77%.
But have a look at industrials and materials. They have some serious work to do if we’re going to see significant upside for the value factor.
Before we can bet on a sustained rotation into value stocks, we need to see participation broaden to these sectors as well. Financials and energy can’t prop up the entire market.
If you don’t think that’s true, just look at the action from the major averages in recent weeks.
For now, we like the idea of leaning on leadership… and that’s financials and energy.
When it comes to the health of the overall market, we want to see an improvement in market internals from industrials and materials.
These groups following energy and financials to new highs would be a very bullish development. But before that can happen, we’ll need to see more highs beneath the surface!
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