Growth Breaks Out Against Value As The NASDAQ Top Fails To Complete

• NASDAQ is leading on the upside again
• The Technology/Staples ratio continues to signal the all-clear for the whole market
• Growth versus value is tipping towards growth

NASDAQ is leading on the upside again

Back in July the NASDAQ Composite was the epicenter for the coming market weakness, as it experienced a powerful outside day and relative action began to cave in. This week it has regrouped, and is now set to lead the whole market higher. Chart 1 shows that in mid-August the NASDAQ Composite came within a whisker of completing a head and shoulders top, but backed off at the last moment. In the last two trading days the Index has succeeded in breaking above the green downtrend line joining the top of the head with the potential right shoulder. In pretty well most situations such as this, that kind of action represents the odds changing signal that the head and shoulders is not going to “work”. If so, we could expect to see a strong advance follow, as that is usually the consequence of a failed pattern. It tends to happen, because all those who sold short, in anticipation of the negative pattern, are forced to cover those positions and complete with new buyers. Judging by the recent plethora of articles in the financial press forecasting a decline, there were probably a lot of bearish bets out there.

The potential for an extension to the rally is also supported by the daily KST in the lower window as it has just started to sharply reverse to the upside.

Chart 1

Chart 2 tells us that the NASDAQ has emerged again as one of the leading sectors, since the RS line has just broken its correction down trendline and the KST for relative action, in the bottom window, has already gone bullish.

Chart 2

Chart 3 features NASDAQ new highs minus new lows, or rather its 8-day MA. We use the smoothing because the raw data is somewhat jagged. The green arrows show that in most situations when the new high series has moved above the equilibrium level, the NASDAQ has rallied. Unfortunately, it does not tell us how high or how long the advance will last. As long as it continues to rise though, wet should assume that the rally is intact. You can always update this chart by clicking on it and saving it in one of your chart lists.

Chart 3

Finally, data for NASDAQ stocks trading above their 50-day MA’s can often be useful for confirming turning points in both directions. The raw data is fairly jagged and does not readily lend itself to moving average crossovers as generating signals. However, KST buy signals, such as the one just triggered, do appear to work reasonably well. These have been flagged by the arrows in Chart 4.

Chart 4

The Technology/Staples ratio continues to signal the all-clear for the whole market

Chart 5 compares the ratio between the iShares Technology and SPDR Consumer Staples (XLK/XLP). When it is rising, it means that the more speculative technology stocks are out-performing the defensive consumer staples. A rising relationship obviously means that tech stocks are the preferred trading or investment vehicle. However, it also has another meaning, in that an advancing ratio also reflects growing confidence amongst investors and traders in general. Rising confidence translates into rising prices, and we can see from the green shadings in the chart that a rising Tech/staples ratio almost invariably means a higher S&P Composite.

This relationship recently broke out from a huge base, which had long-term bullish implications for the market. This week it experienced a new high, thereby underpinning the case for the S&P to follow suit. The ratio currently falls well below the technical objective indicated by the base, which suggests plenty of unrealized upside potential.

Chart 5

Growth versus value is tipping towards growth

Chart 6 shows the long-term relationship between growth and value stocks, as reflected by the two SPDR ETF’s reflecting those categories, the IWW and the IVE.  The chart tells us that the ratio is just starting to break above a 16-year resistance trendline, and that this is being supported by a long-term KST that has only just gone bullish. So far, the breakout is somewhat anemic and I would like to see a bit more of a decisive move before totally endorsing it.

Chart 7

However, Chart 7, which features the same relationship in the center panel, indicates a more decisive break. Moreover, its short-term KST is in bullish mode and is not yet overextended. That suggests that the current phase of the rally has further to run. One implication of this breakout, is that it really has no implication for the market as a whole. For example, in the 2014-16 period the ratio was in a rising mode and the S&P traded sideways.  For most of 2016 the market rose and the ratio sold off. Finally, since the end of 2016 the ratio and market have both been rising.

The one conclusion we can come to is that a rising ratio is positive for growth stocks relative to value and that the recent breakout represents a long-term one, and probably a more speculative phase of the bull market. Speculative phases, of course, offer high reward at the expense of greater risk. Long-term investors take note!

Chart 8

Finally, Chart 8 presents the daily KST for the world’s principal markets. Only China and the iShares MSCI Emerging Markets are currently bullish, but the others all look set to follow suit.

Chart 8

Good luck and good charting,
Martin J. Pring

The views expressed in this article are those of the author and do not necessarily reflect the position or opinion of Pring Turner Capital Group of Walnut Creek or its affiliates.