From the desk of Steve Strazza @Sstrazza
We’ve covered the Growth vs Value relationship ad nauseam since late last year.
We continue to believe that a structural trend reversal in favor of Value is underway.
We laid out our thesis and the key level we’re watching to potentially prove it wrong… That is and has been 1.70 in the Russell Large Cap Growth vs Value ratio.
Here is a long-term view of the $IWF/$IWD chart:
These ETFs made their public debut just before the peak and subsequent “popping” of the dot-come bubble. The ratio also peaked around the same time.
And Guess where..?
It was actually 1.66 and change to be exact, but we draw our support and resistance levels with crayons, not pencils. They are zones, not lines.
It seems pretty clear when we zoom in and take a closer look, that this is a critical area of interest. Here is a daily chart looking back to 2019:
After finally completing its 20-year base and breaking out to fresh record highs last June, price immediately retested 1.70.
Momentum began to wane and the ratio peaked and started to roll over in the second half of last year. In the following months, the level was tested – and, successfully defended – a handful of times again.
It was not until late February/ early March that we got a decisive break below 1.70. We’ve been overweight value stocks ever since.
Notice how momentum supported the completion of this topping pattern with an oversold reading. We also saw confirmation in the form of breakdowns from similar ratios. One of them is Small Cap Growth $IJT vs Value $IJS, shown here:
Now IWF/IWD is knocking on that key former level from below, but it has turned into a strong level of overhead supply and has been a barrier for this ratio for the better part of April. The same is true for the corresponding breakdown level in the Small Cap ratio.
So, the question we’re asking today is: “was that it for Growth?”
Based on the charts above, it seems that way. But lets take a look at what some other data points are telling us right now.
First, we always say that this relationship is driven primarily by two sectors: Technology and Financials. This is because they are the heaviest weightings for each factor.
The ratio of the Tech and Financial Sector SPDR ETF has held up much stronger than Growth vs Value. Here’s a look at the daily chart of $XLK/$XLF:
It hasn’t broken below its dot-com bubble highs yet (gray support zone), but after violating a 2-month uptrend line this week, it looks like it’s headed back to that key 3.70 level. A decisive breakdown and completion of this topping pattern would be the nail in the coffin for Growth.
How about the near-term momentum of these groups?
Seeing the above ratios start to roll over, we’d think Value would start to pick up steam.
Here is a look at the 2-week performance of these sectors:
All the value sectors are higher, particularly Energy $XLE. Meanwhile, all of the growth sectors are muted and more or less unchanged.
Growth had a decent run over the past few months, but it sure looks like the tide is shifting back toward Value.
We expected a counter-trend rally in this relationship, and that’s exactly what we think just played out. Now, it’s time to see if value reaccelarates and picks up a strong leadership role again.
This would reinforce our thesis and current outlook that the primary trend is no longer in favor of growth. We want to be leaning on value as long as that ratio holds below our key level, and for now, it looks like that’s going to be the case.
Are you fading this bounce in growth and adding more exposure to value? We sure are.
Drop us a note and let us know what you think!