By Chad Karnes
It is no secret the Nasdaq (NASDAQGIDS:^IXIC) and Russell 2000 (NYSEARCA:IWM) have been hit much harder than the larger cap indices the last two months, still down over 6% and 8% each from their March price tops.
This is a big difference from pullbacks of the past when the higher beta indices holding technology companies and small caps performed much better in market pullbacks.
This is so different, in 35 years of history the performance difference of 6% between the Dow after making new 52 week highs and the Russell 2000 is one of the largest spreads in history.
Beyond a simple risk off scenario, there may actually be a larger theme at play.
Shift into Safety Sustainable?
The chart below is similar to one provided along with commentary to our ETF Profit Strategy Newsletter subscribers that shows the iShares S&P 500 Value ETF (NYSEARCA:IVE) compared to the iShares S&P 500 Growth ETF (NYSEARCA:IVW).
Recently, there has been a massive shift out of growth and into value stocks over the last month.
As highlighted by the blue circles that show overbought status, the expectation outlined to our subscribers was for a cooling of that shift, which indeed has occurred as things have settled down the last few weeks and growth makes up some lost ground.
But, is this shift to value part of a longer term theme?
The ETF that tracks Biotech companies has risen over 300% since the 2009 market lows and over 200% since the market’s last 20% pullback in 2011, greatly outperforming the broader markets.
This outperformance may mean these companies are due just a normal correction of the trend. But it could also mean they were indeed in some kind of bubble, rising beyond any rational explanation.
The chart below shows this verdict is still up in the air as Biotechs so far have equaled the 2011 decline, the largest pullback since the financial crisis, now a 24% peak to trough move.
But prices have also found support at a long term trendline shown in dashed blue that shows buyers have entered the market where expected, keeping the uptrend in place.
Another chart provided in our May 2014 Newsletter shows that the value versus growth trend, although much changed over the last few months and certainly short term overbought, remains in a longer-term five year sideways consolidation where growth and value have performed similarly.
In other words, over the last five years whether you chose growth stocks or value stocks, your returns would have been similar. That trend has not changed, technically, but the shift over the last few weeks certainly suggest the longer term trend may be changing from growth oriented to value focused.
If Biotech, a good proxy for growth and momentum shares, breaks its uptrend, this will only strengthen the case. That will mean shifting your assets into safer classes would be prudent as value breaks out of its five year trend, continuing its outperformance of growth.
Disclosure: No positions