Growth vs. Value Update: Does the Market Know Something?
Updated
Today, a leading technical analyst noted that growth was breaking out vs. value. This analyst flipped bullish a few days ago from bearish, after the US indices rose well off the 5/20/22 lows.
Having pulled up my relative charts—the above chart is a ratio chart of RPG vs RPV—downtrend lines have been broken to the upside. Note the blue and the red downtrend lines which will be discussed below.
Considering this relative chart (also called a spread chart) of growth vs. value, it is apparent that short-term downtrends have been broken. The blue line represents the latest downtrend. However, consider the red line, representing a downtrend from mid-December 2021 to mid-March 2022. This downtrend line was broken with the powerful rally from March 15-29, 2022. But even though this downtrend line was broken, the downtrend resumed in earnest as of early April 2022.
But it could also be argued that the longer-term downtrend from December 2021 to May 2021, a more significant trendline given its length, has been broken as well. See the orange line in the chart above.
Should the break of a downtrend make one bullish or bearish? The answer is not yet clear. It's definitely worth watching growth vs. value. If equal-weighted technology continues to outperform, this could mark a significant rally for technology / growth into mid-to-late summer.
But it could also merely represent a strong bear rally where the underperformers bounce back hard because they've been stretched to the downside.
The Fed has not yet signaled it intends to let up in its tightening / hawkish policy. Does the market know something the Fed doesn't?
Short-term traders may wish to trade growth to the upside after waiting for retracements (pullbacks) that do not fail at key support. Longer-term investors may want to wait for better entries (e.g., a sizeable retracement of the move off the lows—watching carefully that retracement does not gather trend-like speed and momentum.
Having pulled up my relative charts—the above chart is a ratio chart of RPG vs RPV—downtrend lines have been broken to the upside. Note the blue and the red downtrend lines which will be discussed below.
Considering this relative chart (also called a spread chart) of growth vs. value, it is apparent that short-term downtrends have been broken. The blue line represents the latest downtrend. However, consider the red line, representing a downtrend from mid-December 2021 to mid-March 2022. This downtrend line was broken with the powerful rally from March 15-29, 2022. But even though this downtrend line was broken, the downtrend resumed in earnest as of early April 2022.
But it could also be argued that the longer-term downtrend from December 2021 to May 2021, a more significant trendline given its length, has been broken as well. See the orange line in the chart above.
Should the break of a downtrend make one bullish or bearish? The answer is not yet clear. It's definitely worth watching growth vs. value. If equal-weighted technology continues to outperform, this could mark a significant rally for technology / growth into mid-to-late summer.
But it could also merely represent a strong bear rally where the underperformers bounce back hard because they've been stretched to the downside.
The Fed has not yet signaled it intends to let up in its tightening / hawkish policy. Does the market know something the Fed doesn't?
Short-term traders may wish to trade growth to the upside after waiting for retracements (pullbacks) that do not fail at key support. Longer-term investors may want to wait for better entries (e.g., a sizeable retracement of the move off the lows—watching carefully that retracement does not gather trend-like speed and momentum.
Note
I also want to comment that the very long-term uptrend line (also blue) going back years in the above relative chart is also overhead resistance to this spread chart. It will be interesting to see how growth vs. value performs when reaching the underside of this major resistance line.Note
In the original post (above), I noted that the breakout past the trendline in growth vs. value (spread chart) may "merely represent a strong bear rally where the under-performers bounce back hard because they've been stretched to the downside." And the post also recognized the potential for a bullish case, though saying it remained unclear whether the break of the downtrend in growth vs. value (spread chart) was the start of a major trend reversal for growth / technology.UPDATE: Growth turned down sharply this week along with the major selloff in the indices. But the downtrend line that was broken to the upside on May 27, 2022, has not yet been reached again even though growth vs. value is falling. So it remains to be seen whether this trendline will hold as support. But this will be important to watch.
I suspect that with inflation readings remaining hot and the Federal Reserve continuing to tighten policy, this may have been a false breakout also known as a whipsaw. But I will be keeping an eye on the orange trendline above to see whether it holds as support as indices continue falling in the coming weeks or whether it fails. I will keep an open mind, though I'm leaning slightly toward the bearish view that growth has further to fall. Good luck this week!
Note
In the chart above, growth is still outperforming value. This makes me wonder if the market is now seeing a recession as a more likely scenario. The 10-2 yield curve has been inverted now for several days, and this is the second period of inversion for that curve. This RPG/RPV ratio will be worth watching on the next leg lower in indices.
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