The stock market started the week concerned about the path of both inflation and interest rates. By the end of the week, inflationary fears seemed to dominate even though several companies reported strong earnings despite the challenges. The yield on the 10 Year T-Note closed the week lower and the mixed trading in the averages was reminiscent of the summer
On Friday the Dow Jones Industrials closed down 269 points while the Nasdaq 100 Index was up over 90 points or 0.55%. It was another good week for the Nasdaq 100 as it again made significant new highs gaining 2.3%. This was in contrast to the 2.8% decline in the iShares Russell 2000.
The S&P 500 managed a 0.3% gain while the Dow Jones Transportation Average lost 1.%% just a bit weaker than the Dow Jones Industrial 1.4% loss. The Dow Jones Utility Average did close up 0.7% for the week.
The market action last week had a dominant theme, growth overvalue. Last week the S&P Growth Index (IGX) was up 4.1% while the S&P Value Index (IVX) was down 0.51%. That is a significant difference.
The IGX is composed entirely of growth stocks and the IGX of value stocks. Growth stocks typically exhibit the “strongest growth characteristics”. They are often part of new industries with an alluring narrative and a high potential for profit. However, these stocks are often more volatile than the overall market.
Value stocks are stocks that exhibit a strong balance sheet and are considered to be undervalued based on the analysis of their fundamentals like book value, earnings, and sales to price. Both value and growth components are drawn from the S&P 500.
The most common method of determining the trend in $IGX versus $IVX is to run a ratio of the two. When the ratio is rising, growth is leading, and when it is falling, then value stocks are leading. This monthly chart of the ratio goes back to November of 1999 and includes a 20-month Exponential Moving Average (EMA) of the ratio (red). The ratio peaked in June 2000 as value stocks led growth until the market top in 2007 when growth stocks started to lead the value stocks.
Overall this trend has continued since the bear market low in 2009. There have been several times when the ratio declined as value stocks have outperformed growth for month-long periods. That was the case in the fall of 2020 when the ratio peaked and then dropped back to its 20 month EMA, point 1, in May,
The decline in the ratio is more evident on the weekly chart and in early June the ratio turned higher from the support at line b. This was accompanied by a bullish divergence in the MACD-His, line d. As the rally continued into August the daily analysis then favored a rebound by value but “the monthly and weekly analysis of the growth versus value ratio is positive and does favor growth stocks”.
The weekly chart shows the completion of the year-long trading range, lines a and b, at the end of October. The surge last week is evident on the weekly chart and the completion of the trading range does indicate the ratio can go even higher. The MACD-His crossed above the zero line three weeks ago but is still well below the July high. The daily analysis (not shown) looks strong though the ratio is extended on the upside.
So how do the market internals look after last week? The majority of the weekly Advance/Decline lines are still positive as all except the Russell 2000 A/D line recently made all-time highs. There was some fairly heavy selling last week as on the NYSE there were just 1034 advancing issues and 2491 declining issues.
The daily chart of the Spyder Trust (SPY) looks positive overall even though it has not been able to convincingly overcome the monthly R1 resistance at $470.42. SPY is well above its strongly rising 20 day EMA as well as the 50 and 100 day MAs. The SPY could easily see a further pullback as it closed the week 1.2% above its 20 day EMA at $463.11. The MAs analysis indicates that it is too early to look for a more serious top.
The daily advance/decline lines reflect the divergences between the various markets and the strength of the growth stocks. The Nasdaq 100 A/D line (not shown) made a new high Tuesday and closed the week above its WMA. The S&P 500 A/D line also made a new high then and closed barely below its EMA. The NYSE Stocks Only A/D line is the weakest as it has dropped well below its EMA and the support at line d. The NYSE All A/D line staged a major breakout of a four-month trading range in October, line e, which is a very bullish development. The A/D line made lower highs in the past week and has dropped back below its EMA. The converging support has now been reached so the A/D numbers are the next two weeks will be important.
The energy and financial stocks bore the brunt of the selling last week as stocks like JP Morgan Chase (JPM) and Exxon Mobil are down close to 5% this month while Apple Inc. (AAPL) is up over 7%. This reinforces the selective process that is needed for new purchases. Try to avoid chasing prices and the risk is high if you buy too far from support. For most enjoying Thanksgiving is the best strategy in the week ahead.