A stealthy growth correction

Posted by Cam Hui -

Preface: Explaining our market timing models 

We maintain several market timing models, each with differing time horizons. The “Ultimate Market Timing Model” is a long-term market timing model based on the research outlined in our post, Building the ultimate market timing model. This model tends to generate only a handful of signals each decade.

 

The Trend Asset Allocation Model is an asset allocation model that applies trend following principles based on the inputs of global stock and commodity price. This model has a shorter time horizon and tends to turn over about 4-6 times a year. In essence, it seeks to answer the question, “Is the trend in the global economy expansion (bullish) or contraction (bearish)?”
 

My inner trader uses a trading model, which is a blend of price momentum (is the Trend Model becoming more bullish, or bearish?) and overbought/oversold extremes (don’t buy if the trend is overbought, and vice versa). Subscribers receive real-time alerts of model changes, and a hypothetical trading record of the email alerts are updated weekly here. The hypothetical trading record of the trading model of the real-time alerts that began in March 2016 is shown below.

 

 
 

The latest signals of each model are as follows:
  • Ultimate market timing model: Buy equities
  • Trend Model signal: Bullish
  • Trading model: Neutral

Update schedule: I generally update model readings on my site on weekends and tweet mid-week observations at @humblestudent. Subscribers receive real-time alerts of trading model changes, and a hypothetical trading record of those email alerts is shown here.
 

Subscribers can access the latest signal in real-time here.
 

 

Growth stocks stumble

Marketwatch reported last week that a meltdown of Cathie Wood’s ARK Innovation ETF (ARKK) may spark a S&P 500 pullback.

 

“Many of the ARK and similar funds that hold high growth stocks are now trading between one and two standard deviations below their 50[-day moving averages] where buyers usually enter,” said technical analyst Andrew Adams in a Wednesday note for Saut Strategy. “I don’t think the market needs to go down any more, so a bounce attempt should occur given all the nearby support levels.”
Since the publication of that article, ARKK and other growth stocks have weakened further relative to the S&P 500.
 

“If the high-growth areas start breaking support and taking the rest of the market down with them, then maybe the 3,980-4,000 zone in the S&P 500 will be retested after all,” Adams wrote. The S&P 500 finished at 4,167.59 on Wednesday, 1% off a record close of 4,211.47 set on April 29.

 

A test of support in the 3,980-4,000 area would mark a pullback of only 5% to 6%, but given the damage seen in other parts of the market could lead to “some huge losses” elsewhere, he said. “I’d rather avoid that, so for now I think we can use yesterday’s lows as a test to see if that represented a selling climax in much of the market.”

The growth-heavy NASDAQ 100 bounced off a test of its 50-day moving average (dma) after being rejected twice at resistance. More worrisome is the breach of the relative support zone of NDX compared to the S&P 500 and ARKK to the S&P 500. Market internals such as the percentage of NASDAQ 100 stocks above their 50 dma is not oversold enough to signal a durable bottom.
 

 

 

Resilient Value

On the other hand, value stocks have been resilient and holding up the market. The value to growth ratio is soaring, though a little overbought. The Russell 1000 Value index remains in a well-defined uptrend while the Russell 1000 Growth index is struggling with a key support line. 
 

 

A review of the relative strength of the top five sectors tells the story of a bifurcated market. In aggregate, these sectors account for roughly three-quarters of S&P 500 weight and it would be difficult for the index to rise or fall without the participation of a majority of these sectors. Growth sectors, such as technology, communication services, and float-weighted consumer discretionary stocks, which are dominated by heavyweights AMZN and TSLA, are underperforming the S&P 500. By contrast, value sectors such as financials and equal-weighted consumer discretionary stocks are strong.
 

 

 

The bears haven’t seized control yet

However, there are no signs of significant technical breakdowns just yet. The relative strength of defensive sectors is strong indicating that the bears haven’t seized control of the tape.
 

 

To be sure, there are some warning signs. Mark Hulbert pointed out that the Shiller Crash Confidence Index, which measures whether investors are worried about a stock market crash, has declined precipitously. Hulbert concluded that ” the outlook for the next six- and 12-month periods would appear to be quite modest”,
 

 

The bond market has caught a bid and it is attempting an upside breakout from a possible inverse head and shoulders formation.
 

 

Both gold and silver have staged upside breakouts. Precious metals tend to be viewed as defensive and negative beta plays.
 

 

Bloomberg also reported that “Sam Zell Buys Gold With Inflation ‘Reminiscent of the ‘70s’”.
 

Billionaire investor Sam Zell is seeing inflation everywhere, and has bought gold as a hedge — something he says he used to knock others for doing.
 

“Obviously one of the natural reactions is to buy gold,” he said in a Bloomberg Television interview. “It feels very funny because I’ve spent my career talking about why would you want to own gold? It has no income, it costs to store. And yet, when you see the debasement of the currency, you say, what am I going to hold on to?”
 

Zell, 79, said he’s concerned not only about the U.S. dollar but other countries printing money as well, and questioned whether inflation will be transitory, as Federal Reserve Chairman Jerome Powell indicated last week.

I conclude from this analysis that while there are downside risks to the S&P 500, the weakness is only confined to growth stocks. Value stocks are still strong and they are holding up the index. My base case scenario calls for a period of choppy sideways consolidation for the S&P 500. Until a bearish catalyst appears for value stocks, which have cyclical characteristics, the overall market should hold up well.

 

In the short-run, the S&P 500 is overbought and due for a pullback early in the week. I am watching to see how the market behaves after the overbought condition is resolved later in the week.

 

 

I will be especially monitoring the price action of the growth-cyclical bellwether Semiconductor Index (SOX). SOX rallied last week after testing a rising uptrend to regain the 50 dma. However, the 50 dma has stopped rising and it is on the verge of falling, indicating the possible start of a downtrend for the group. Moreover, SOX breached an important long-term relative uptrend against the S&P 500.

 

 

 

25 thoughts on “A stealthy growth correction”

  1. Addendum: Now that Dogecoin is unraveling, does that translate to a risk-off episode for NDX and ARKK on Monday?

    1. Cam- I still think your -5% to -10% scenario is in play. It will happen when traders least expect it. As a long-time observer of the markets, it’s just something I’ve seen time and time again. Something else that’s always the case-> we’re always going to be off by a week or a month or whatever. No one’s going to nail the timing.

      1. In my humble opinion the market is entering into a broad trading range which is ideal for traders. I would now watch the following indexes for “tells” : the US dollar, the Semi-Conductor Index (SMH) , gold (GLD,GDX) and Nasdaq(NDX). When the NDX is overbought I would short the SMH and when $DXY is overbought I would go long GDX.

  2. Nice trades, Ingjiunn! You have a pretty methodical approach that seems to pay off well over time frames of several months.

    I would agree that inflation is real. It’s also unlikely to be as ‘transitory’ as the Fed would have us believe.

    I’ll add an anecdote. The Bay Area has experienced droughts for much of the past fifteen years, and ten years ago we began moving to drought-resistant landscaping. My wife loves gardening, and began planting and then growing succulents about five years ago. We would drive down to nurseries in Watsonville, pick up tiny plants for $1-$2, which she would grow into mature plants for the yard. It’s now a side business for her. The pandemic fueled sales to the point where she had two greenhouses constructed in the lower yard. We no longer drive to Watsonville – she has an import license from the USDA and orders rare plants from suppliers in Korea. I don’t follow prices that closely but every few weeks it seems the numbers are higher. Demand destruction – I don’t see it yet. At some point, the plant fad will fade as these things always do. At that point, we’ll tear down the greenhouses and think about an ADU – probably the next wave of construction to hit the Bay Area.

  3. A key date for Value and Growth Factor is coming up May 19, when the iShares Momentum ETF MTUM has its once-every-six-month rebalancing days (I believe they spread it over a few days). This is a $14 billion fund and I’m sure many institutions use the same underlying MSCI Momentum Index.

    The turnover will be historic. When they did it last November, the ETF ended up with 1.5% Financials and ZERO Energy because they were down and Tech was leading. That is going to change in a huge way since the November 9, Vaccine TWIST Day turned Value especially Energy and Financials into leadership.

    The rebalance uses a six month and a one year lookback. Here is a chart showing those lookbacks for three key stocks Microsoft (Second largest MTUM holding), JP Morgan (big Bank) and Conoco (big Energy). It shows how energy and financials have caught up (one year) and passed (over last six months) Technology.

    https://refini.tv/33A6ug5

    The rebalance day could mark a relative high in the Value to Growth relationship.

    If anyone can confirm the May 19 date or find another, please post it. Also, tell us how they will do it, for example gradually a few days before and/or after?

    This is very significant and very new since Growth and Value have never diverged so dramatically as they have in the last six months.

    1. This is a terrible stat but I think it may be skewed and not reflective of Vancouver. First of all it is 100 in total so it does not represent a wide-scale incident of hate crimes. It is what was reported to police. It could also be because hate crimes against Asians are so unusual in Vancouver. For example, if you take the reported number of muggings in any Canadian city they would be greater than New York. Why, because nobody reports a mugging in New York. It’s so common and the police can’t or won’t respond anyway.

      I just finished a video of a social media guru who says media reports the horrible because it draws our eyeballs to our phone and hence profits the the platform (Facebook, Google etc). This report on 100 incidents making Vancouver look bad got me to click. Bingo, their algorithm got me too.

      About the second point of one out of two reporting a hate incident, we don’t know how the survey questions were worded. Was it casual racist comments or in your face spiteful and violent interactions? Not to gloss over any racist talk but there is a scale.

      The Covid did start in China and ignorant people (and racism is the height of ignorance and stupidity in my thinking) might blame the Chinese race. This will go away. Hell, maybe it will morph into a British hatred with the British Variant or I understand there is a Californian strain. Maybe the ignorant folks will burn their Beach Boy records.

      1. An off topic but relevant. An NBCnews story from March sheds more light on it. IMO, what is reported and tallied is probably the tip of the iceberg. An incident with a person probably has impact on multiple people in their circle. It is more than a numbers story. In my early days in US, I wrote it off as the price you pay to make a new life. When our children were emotionally hurt, we taught them to focus on the academics and be strong. They have grown up with a deep sense of fairness and compassion. Yet, they are always aware of the possibility of incidents happening to them or their families. So, it is a much bigger story across generations than the 100 reported incidents in a year.
        Lot of work yet to do.
        PS: Cam, please delete the post if you feel it is off base.

    2. Good to hear hate crimes against Asians are unusual in Vancouver. Our family has always felt safe there.

      Also unusual is the recent spate of hate crimes against Asians in the Bay Area. You may be right – it’s a recent phenomenon and the media is actively seeking and reporting stories.

      1. I think there is real uneasiness latent in Vancouver area toward the new second wave of money from China. I know Vancouver well enough to have confidence in my observation. The first wave of money comes from HK and TWN, triggered by 1997 event. It disrupted the local RE markets.

        The recent wave of money is from China, much larger and pretty much corrupt free money. So the disruption is much larger. And the new wave of people are in self-segregation mode. Like the Concessions in 19th century Shanghai, but the other way around this time. Huawei CFO in house confinement has shined a spotlight on this development. Moreover there are quite a few bad actors and companies they set up engaging in illicit RE deals. If you are interested in this topic you can go to Youtube for some viewing.

        The local communities began the discussions a few years ago. Yes Canada needs capital, but at what price. Today people are a lot more confrontational than in 1997. Expect this issue to eventually bubble to the surface. I don’t know much about Toronto, Melbourne, Sidney. But I expect similar discussions over these cities.

  5. “Cam- I still think your -5% to -10% scenario is in play. It will happen when traders least expect it”.

    If I make this statement every day, I will be right one day.
    So far, markets have stayed close to all time highs against all odds. Urban Carmel is on record that 10% correction happens almost once every year. So, one has 100% chance of being correct once an year, if one says there will be 10% correction.
    Ravindra is right. In the longer term, VTI is going to be hard to beat. Trading from value to growth may be difficult to achieve.

    Bloomberg also reported that “Sam Zell Buys Gold With Inflation ‘Reminiscent of the ‘70s’”.
    Inflation has not reared its ugly head since 1982. What are the statistical odds, we get high inflation, something that has not happened for the last 39 years?

    1. Haha! Well, perhaps a 90% chance of being correct once a year.

      You know, I think over the long run most of us end up performing reasonably well despite differences in time frames/ methodologies/ perspectives. We each possess an edge of some kind. Cam’s track record, which is transparent, is good. Were I to invest in a fund managed by Cam, I would not be worried. He has reasons for expecting an imminent correction. And he may be wrong. That’s OK. We’re all wrong at times. I’ve disagreed with his take many times in the past, most notably during the 2020 runup. In the present instance, I happen to agree with him.

  6. Large and mid-cap value have been doing well, small cap value, not so much.

    1. As an example, VB has slightly underperformed SPY for the last month and a half. But its OBV is still positive and its RSI ticked up toward the end of the week, so it isn’t a total dog, but it’s nothing to get excited over either.

  8. The growth stock correction doesn’t look stealthy at all to me 😀
    PICK is doing quite well today again, but copper pulled back after maybe getting a bit “overchased” this morning (including the controversial headline mentions everywhere)

  9. Nice call, Cam – you nailed it.

    I’m opting not to chase the value names here.

    Also opting to wait for confirmations of reversals in growth before jumping back in.

    Cash may be boring – but I’ll take boring over scoring when the odds are against me.

    1. To the extent that I’m able to outperform the market, it’s never due to larger gains – it’s always been avoiding the draw downs. I’m not always able to avoid corrections, of course. But it’s happened often enough (and arguably more often due to luck than skill) that I prioritize capital preservation.

    2. Kudos to Ken as well – not only for his November call to rotate into value/cyclicals, but for moving into RSP a few weeks back-> still green in stark contrast to SPX.

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