Growth Is Breaking Out Against Value

Growth versus value and a possible mega breakout favoring growth

• The technology/staples ratio supports the growth/value breakout
• Some credit spreads are looking shaky
• Are stocks finally breaking against commodities?

Growth versus value and a possible mega-breakout favoring growth

Chart 1 compares the performance of the S&P Growth ETF (IVW) to its value counterpart (IVE) back to the turn of the century.  I don’t usually follow this popular relationship, but it seems to me to be worth considering now, because it looks as though it’s in the process of cracking through a multi-decade resistance trend line. If that breakout turns out to be for real, it would represent a very powerful long-term signal that growth will continue to outpace value. Since the plotted data also includes dividends this breakout is a total return one.

The chart also features the Special K indicator (SPK), which you can read about here. This is a long-term series that combines short, intermediate and long-term momentum into one unit. Trend reversals signals come when the SPK crosses above and below its red signal line. Other indications develop when it is possible to construct trend lines of a duration in excess of 9-months, which are subsequently violated. Several combinations are featured in the chart. Note that they are all confirmed with a similar penetration by the price. Based on that technique we are presented with an incomplete signal. That’s because the price has broken to the upside but this has not so far been confirmed by the SPK. It’s true that the SPK is already above its signal line, but it really needs to break above that thick green 2009-2017 down trend line if this indicator is to support a higher ratio.

Chart 1

Chart 2 suggests that it will happen, because both the short-term and long-term KSTs are in a rising mode. Note the blue arrows, which flag the series of rising peaks and troughs. I’ve also included the S&P Composite in the top window, merely to demonstrate that swings in the ratio are not that well correlated with price movements in the overall market.

Chart 2

The technology/staples ratio supports the growth/value breakout

An indirect proxy for the growth/value relationship comes from the ratio between the Spider Technology (XLK) (growth) and the Spider Consumer Staples (XLP) (value). This is shown in Chart 3, where you can see a break to the upside earlier in the year. This was no ordinary breakout since the base took 15-years to complete. It therefore signals that a mega-uptrend favoring technology is underway. Currently, it is overextended, so some corrective action would certainly not be unexpected. However, this relationship has yet to reach its upside objective, as flagged by the two blue arrows. Unlike the growth/value ratio, this relationship does influence  the S&P. In that respect, the green shaded areas flag periods when it has been in a rising mode. Looking at the green shaded areas against the S&P itself, it’s fairly obvious that when the more speculative technology is outperforming the defensive staples, this surge in confidence supports a higher overall market.

Chart 3

Some credit spreads are looking shaky

Another way of monitoring investor confidence is to compare the performance of a poorer quality bond to a one of a superior credit rating. One of my favorites is the ratio between the iBoxx High Yield and the Barclays 20-year Trust (HYG/TLT).  When this relationship is rising, it indicates a trend of improving confidence as bond market participants are willing to overlook the safely of governments in favor of the juicy current income promised by the riskier junk bonds. The ratio is featured in Chart 4, where you can see that it experienced a false upside break in October. I always like to see some supporting evidence of this type of action in the form of further trend deterioration by the price itself. In this case we can observe a negative 200-day and 50-day MA crossover, as well as a drop below the small dashed red trendline. Thursdays’ close took it below the all-important 2016-17 up trendline, but the break is not yet decisive. The declining KST in the lower panel suggests that it soon will be.

Chart 4

An alternative way of looking at the same thing is to compare the  HYG and the shorter term maturity Barclays 7-10-year ETF, the IEF. A similar message is being transmitted, in that we can observe a false upside break followed by a 2016-17 up trend line violation. In this instance the price is right at the 200-day MA but below its 50-day counterpart.

The bottom line is that most of the time these ratios move in tandem with the S&P Composite, so their recent deterioration is not a good sign. That doesn’t mean that the bull market is over. However, it does indicate that confidence, as reflected in the “Trump Bump” may finally have begun to erode, thereby supporting the idea of additional corrective activity for the market as a whole.

Chart 5

Are stocks finally breaking against commodities?

One of the strongest intermarket relationships in recent years has been the superior performance of stocks against commodities. That relationship is shown in Chart 6. The ratio is still managing to hold above its 200-day MA, though it is evident that the 2014-17 up trendline has been decisively violated. Most negative of all is the divergence between the SPK, in the lower window and the ratio itself. Note that the SPK has also completed a top in the last few days. All of this evidence suggests that the recent trend of superior equity performance is giving way to a weaker one. Alternatively, it could take the form of some indecisive range bound activity.

Chart 6

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.