Growth vs. Value: Skating to Where the Puck Will Be
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Hockey legend Wayne Gretsky famously said: "Skate to where the puck is going to be, not where it has been." This sometimes applies in investing and trading.
Towards what object have investors been skating, figuratively speaking?
Currently, financial media, fund managers, and commentators have been emphasizing the opportunities in value over growth for several months. And for good reason: Energy, a value / cyclical sector unloved for about a decade, has outperformed every other sector this year by a huge margin. It has risen by approximately 20.5% since January 1, 2022. Even it's uptrend channel could not contain it (although it looks to be consolidating at the moment or perhaps mean-reverting).
Increasingly, market participants have been "skating" towards value areas and away from growth for over a year now, as anyone who has been burned by long trades in tech / disruptive innovation knows. For example, a spread chart (also called a ratio chart) of ARKK/SPY shows just how dramatically growth has struggled. ARKK is a well-known US ETF containing high-beta stocks typically categorized as disruptive-innovation stocks, i.e., high growth names.
This chart evidences just how much growth has struggled vs. the S&P 500. Notice, though, how this spread chart shows how close to major, long-term support the ratio has moved.
Examples abound of high-growth names having been crushed in powerful bear markets in those names. Some of them are even top names with innovative products and services and an impressive record of earnings / sales growth: Square (
SQ) has declined about -68% from all-time highs, Upstart (
UPST) fell about -81% from its high to its low in late January 2022, and (
Roku) dropped about 78% from its peaks. Even large cap tech not gone unscathed: Facebook 
FB suffered a nearly -50% decline after a huge earnings / guidance disappointment. But in general, large-cap tech has been the exception in growth until the selloff this year. While growth / tech in general has struggled for months, large-cap tech names such as GOOGL, AAPL, MSFT, and NVDA have outperformed. Even AMZN's sideways move for about a year should be considered outperformance relative to other high-growth names as shown by the ARKK chart above: see the chart below, which is a relative chart of AMZN vs. ARKK, revealing that even with AMZN's lengthy sideways move, it has dramatically outperformed growth / tech names more generally.
Markets are in constant flux. So often, just when the little people (retail traders like me) take notice of a powerful new trend or outperformance, it ends. So I'm trying to watch for where markets are moving rather than focusing on where they are.
In short, is growth bottoming out relative to value? Here are a few charts to consider.
1. The main weekly chart above (also copied below) is a spread chart showing the ratio of
IJT (small-cap growth) vs. small cap value. Notice how close to major long-term up trendline support the ratio has moved. And the weekly ratio is also right at support at March 2021 and May-June 2021 lows. The RSI for this relative chart also shows that it's oversold to 33.65, a level that only appears in multi-month (and often multi-year) intervals. Even the two RSI lows in 1H 2021 occurred 2 months apart, but this is the exception looking back longer term. 
2. Large-cap growth is right at support at a long-term uptrend line. See the weekly spread chart of the ratio between XLK/SPY.
XLK is a US ETF that is heavily weighted towards large-cap tech.
3. Equal-weighted growth vs. equal-weighted tech RYG/RPV is also very close to long-term upward trendline support.
4. Interest rates are nearing long-term downtrend channel resistance—at the upper line (the actual downtrend line). Interest rates have soared powerfully since mid-2020, and the Federal Reserve has hawkishly signaled coming rate hikes, and market participants have behaved as though rates will keep on going to the moon—by selling tech / growth, which struggle when rates rise b/c of discounting of future cash flows used to value such names. The viewpoint that rates could turn around in the near future seems radical, contrarian and unreasonable. But consider this chart below. Could rates turn around just after a large move just after millions of market participants have been flocking towards value names that outperform in rising-rate environments?
Some well-known experts have already taken this view. cnbc.com/2021/12/16/art-cashin-sees-inflation-peaking-soon-and-other-surprises-for-the-market-in-2022.html
It seems priced into the market right now that the 10-year yield could continue rising, that the interest rates could even breakout higher above long-term downtrend resistance, and that the Fed is likely behind the curve in controlling inflation. It seems consensus that value could continue to outperform long-term, and that growth could break even long-term support levels and continue to plummet. But if this is priced into the market, shouldn't one consider buying what's already priced in? Especially because maybe what is priced into the market will not last. Thinking about where the "puck is going to be" may suggest that tech / growth is making a multi-month or multi-year low or that interest rates are going to pullback in the next few months, allowing tech to thrive again.
Towards what object have investors been skating, figuratively speaking?
Currently, financial media, fund managers, and commentators have been emphasizing the opportunities in value over growth for several months. And for good reason: Energy, a value / cyclical sector unloved for about a decade, has outperformed every other sector this year by a huge margin. It has risen by approximately 20.5% since January 1, 2022. Even it's uptrend channel could not contain it (although it looks to be consolidating at the moment or perhaps mean-reverting).
Increasingly, market participants have been "skating" towards value areas and away from growth for over a year now, as anyone who has been burned by long trades in tech / disruptive innovation knows. For example, a spread chart (also called a ratio chart) of ARKK/SPY shows just how dramatically growth has struggled. ARKK is a well-known US ETF containing high-beta stocks typically categorized as disruptive-innovation stocks, i.e., high growth names.
Examples abound of high-growth names having been crushed in powerful bear markets in those names. Some of them are even top names with innovative products and services and an impressive record of earnings / sales growth: Square (
SQ) has declined about -68% from all-time highs, Upstart (UPST) fell about -81% from its high to its low in late January 2022, and (Roku) dropped about 78% from its peaks. Even large cap tech not gone unscathed: Facebook FB suffered a nearly -50% decline after a huge earnings / guidance disappointment. But in general, large-cap tech has been the exception in growth until the selloff this year. While growth / tech in general has struggled for months, large-cap tech names such as GOOGL, AAPL, MSFT, and NVDA have outperformed. Even AMZN's sideways move for about a year should be considered outperformance relative to other high-growth names as shown by the ARKK chart above: see the chart below, which is a relative chart of AMZN vs. ARKK, revealing that even with AMZN's lengthy sideways move, it has dramatically outperformed growth / tech names more generally.Markets are in constant flux. So often, just when the little people (retail traders like me) take notice of a powerful new trend or outperformance, it ends. So I'm trying to watch for where markets are moving rather than focusing on where they are.
In short, is growth bottoming out relative to value? Here are a few charts to consider.
1. The main weekly chart above (also copied below) is a spread chart showing the ratio of
IJT (small-cap growth) vs. small cap value. Notice how close to major long-term up trendline support the ratio has moved. And the weekly ratio is also right at support at March 2021 and May-June 2021 lows. The RSI for this relative chart also shows that it's oversold to 33.65, a level that only appears in multi-month (and often multi-year) intervals. Even the two RSI lows in 1H 2021 occurred 2 months apart, but this is the exception looking back longer term. 2. Large-cap growth is right at support at a long-term uptrend line. See the weekly spread chart of the ratio between XLK/SPY.
XLK is a US ETF that is heavily weighted towards large-cap tech.3. Equal-weighted growth vs. equal-weighted tech RYG/RPV is also very close to long-term upward trendline support.
4. Interest rates are nearing long-term downtrend channel resistance—at the upper line (the actual downtrend line). Interest rates have soared powerfully since mid-2020, and the Federal Reserve has hawkishly signaled coming rate hikes, and market participants have behaved as though rates will keep on going to the moon—by selling tech / growth, which struggle when rates rise b/c of discounting of future cash flows used to value such names. The viewpoint that rates could turn around in the near future seems radical, contrarian and unreasonable. But consider this chart below. Could rates turn around just after a large move just after millions of market participants have been flocking towards value names that outperform in rising-rate environments?
Some well-known experts have already taken this view. cnbc.com/2021/12/16/art-cashin-sees-inflation-peaking-soon-and-other-surprises-for-the-market-in-2022.html
It seems priced into the market right now that the 10-year yield could continue rising, that the interest rates could even breakout higher above long-term downtrend resistance, and that the Fed is likely behind the curve in controlling inflation. It seems consensus that value could continue to outperform long-term, and that growth could break even long-term support levels and continue to plummet. But if this is priced into the market, shouldn't one consider buying what's already priced in? Especially because maybe what is priced into the market will not last. Thinking about where the "puck is going to be" may suggest that tech / growth is making a multi-month or multi-year low or that interest rates are going to pullback in the next few months, allowing tech to thrive again.
Ghi chú
Humility and flexibility have always been useful in trading. In this spirit, I acknowledge that in weeks or months, markets could prove me very wrong about growth vs. value. Perhaps this will be a *decade* for value with minor comebacks for growth! I want to remain open to this possibility, and will trade accordingly. Further, I wonder if this whole correction was the beginning of a longer-term bear market—or perhaps just the first leg of a 2-leg correction—in which we will see substantial bear-market rallies that may even last weeks or months, followed by further declines. I'm staying open to this possibility, and be willing to be totally wrong, and to change my viewpoint. But a contrarian analysis is at least worth considering even if it ends up being wrong, because sometimes just when everyone is heading for the exit and fleeing growth, that happens to be a tradeable low!
Ghi chú
After this past week's selloff, the thesis that growth is at least temporarily bottoming vs. value has been bolstered somewhat by a divergence that is prominent and clear. Growth vs. value made as a ratio (spread chart) made a lower low, but RSI of this ratio made a higher low. See the divergence trend lines in blue. Ghi chú
I may be far too early with this idea. I thought growth was nearing a bottom based on all the divergences in relative charts shown above. However, the divergences I pointed out remain valid, though the divergences themselves do not present a trade setup just yet. But the level at which tech and growth has been getting crushed in this current geopolitically uncertain environment makes me very hesitant to jump in with two feet into any tech and growth names. I am watching SQ closely as it's filling it's gap from earnings on Feb. 25, and it seems to be holding at the gap level. I wouldn't be surprised, though, if it fell lower given how much selling pressure exists.
In short, remember that the divergences are there on relative charts, and watch for signs that tech may begin to outperform vs. value. I don't know how that would happen in this inflationary / rising-rate environment, but markets often take the unexpected path.
Lastly, SOX broke a key longer-term uptrend level today, March 7, which is just more evidence that markets are in bear territory, so waiting for price stabilization may be a good idea. I am also looking for a bounce generally in the major indices when VIX and the Put-Call ratio reach new highs. But whether that bounce will favor growth / tech remains very much unknown right now.
Ghi chú
Just posted some weekend technical analysis on SPX / ES, and listed some key levels going into next week. Check it out if you can. 
SquishTrade
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