Mailbag: Charting Growth Stocks vs. Value Stocks
Posted April 02, 2021
I’ve received a number of questions about the recent market rotation out of growth stocks and into value stocks.
One of my favorite tools for monitoring rotation situations like these are ratio charts.
Ratio work is when you price one asset against another. In this particular case, I am pricing the S&P 500 Growth ETF (IVW) against the S&P 500 Value ETF (SPYV).
In simple terms, when growth stocks outperform value stocks, this line rises. And when value outperforms growth, this line falls.
Below is the long-term (15-plus years) chart of this ratio. As you can see, from roughly 2007-2019, growth outperformed value at a steady clip. And then, in 2020 when the Fed went nuclear with its monetary policies to combat the COVID-19 shutdowns, growth went absolutely VERTICAL relative to value.
Put simply, by looking at this chart, it was clear growth stocks were where you wanted to put your money for most of the last 10 years.
Now let’s zoom in to look at more recent action.
More recently, growth has been getting crushed while value has been relatively strong. As a result, growth is dramatically underperforming value, which is why this chart has fallen.
However, what’s striking about this chart is the fact that the ratio actually bounced hard off of support (black line) during this breakdown. As I write this on April 2, 2021, the ratio is now forming a falling wedge pattern (red lines).
If this ratio breaks out of this pattern to the upside, we’ll be entering another period of growth outperformance. That’s when it will be time to open up positions in stocks like Tesla, Shopify, Square, and the like.
However, if this chart breaks below support and fails to launch an upside breakout, then this would be a signal that growth is DEAD for the foreseeable future. In that scenario I would steer clear of growth stocks for some time.
Given the intense level of support this ratio has (black line) I lean towards an upwards breakout happening. However, the smart move is to wait for the market to show you what’s happening and then take your position.
Editor, Money & Crisis