Value Crushing Growth

The DJIA is barely down at the moment while the Nasdaq is almost down 1 percent. Value has been crushing growth all year and outperformance has accelerated during the rally from 3500.

Value-Growth ETF Ratios

It still looks like a major relative low in value was made.

Another Way to Look at a Bounce

Here are two price ratio charts of value-growth ETF pairs from Vanguard and Invesco. Different scenarios can drive a reversal or continuation. The charts reverse on bear market rally as beaten down stocks gain the most. They also reverse if energy and commodities lead the next leg down in the bear market. It breaks out if the inflation story accelerates from here.

The First Setup of 2022

I think we have a very high probability setup in play. It's a great setup period, but the question is which direction does it break? I think there is a trade that wins either way, which is why I like the setup.

The setup: the 10-year yield is at a decision point.

The trade: bearish crap-tech aka Cathy's trash and assorted growth stocks. I've posted a lot of these on the blog, those stocks are merely drops in an ocean of trash.

Rationale: Look at the charts below. Value beats growth if the 10-year yield rises. There are lots of trade possibilities. A high conviction trade for a breakout in the 10-year would be a pair trade of long FCX, short ARKK or the choicest cuts within it. the risk with long FCX would be a reversal in rates, a risk-off event (like a more hawkish Fed). Longer-term teh Fed will follow the market and if rates are going higher, then FCX will go up, but in the very short-term it is controlled by whatver comes out of the next Fed official's mouth. #EndTheFed

With trash-tech, if rates go up, stocks like those found in ARKK (to reiterate, I'm using ARKK as a stand-in for the entire market of similar stocks) will underperform and likely drop if the rise in rates is rapid, which is likely on a breakout. If instead rates go down, why are they going down? There could be good reasons, this isn't a guaranteed trade, but my suspicion is a drop in rates would be caused by another hawkish escalation in Fed rhetoric, which could be coming sooner rather than later assuming the Fed cares about expectations. On the other hand, the breakout in the yen says rates may be breaking out no matter what, which makes me lean towards a breakout being in the cards right now.

On a 10-year breakout. Long: value, commodities, financials, USDJPY (US dollar in general), crypto. Short: growth, tech.

On a 10-year reversal, reverse the outlook. Energy and commodities could lead the way lower in a rout of the value/inflation trade, but the ARKK-related trades probably don't do well if its a Fed-triggerd correction.

Value is undervalued relative to growth if interest rates go higher.

Energy versus SPY.

FCX is the 10-year yield.

And how about that Japanese yen? The 40-year restistance line is coming up following today's breakout.

If the 10-year yield breaks out, recent history says news highs for BTC may also be coming.

Update: I posted this right before the open and the early action confirms my expectation. TLT exploded higher after some economic data was released and ARKK collapsed.

What Inflation? Value Gives Up Recovery vs Growth

The charts show pairs of growth and value ETFs, with the value as the numerator. Value stocks usually include energy, industrials, financials and materials. Growth is dominated by technology companies in various sectors (Amazon, Google, Facebook and Tesla are all tech companies to me, but they are in three separate sectors). It shows the market has almost completely reversed the relative gains in value shares since the low in 2020 when value stocks implodoed during the pandemic panic and technology stocks soared thanks to the lockdowns and the Federal Reserve. Value stocks then rallied strongly on inflation concerns, rising commodity prices, rising interest rates, etc.

Coronavirus is Y2K, Large-Cap Value Erases Performance Gap in 2 Weeks, The Inverted Crash

I've laid out before how the coronavirus might be like Y2K, in that it provided the juice for the final blow-off top in the technology sector, and probably the whole market since tech probably won't tumble in isolation. Look at these pure value and pure growth ETF ratios, with value at the numerator. Value crashed and stayed down during the pandemic.

This chart presents it better. Technology had its blow-off top. it crashed upwards in a move that only has a comparison with the 2008 crash. The prior spike peak was March 6, 2009. It formed a rounded-top this time because it wasn't a crash down in value like in 2008, but a "crash" upwards in technology. Before 2009, it was a tech blow-off in late 1998-2000. The peak in 2009 marked the bottom of the bear market. The peak in March 2000 marked a bull market peaking. March 2021 looks like it is rhyming.