ETF Charts Showing a Market in Transition from Momentum/Tech to Value/Industrials?

ETF Charts Showing a Market in Transition from Momentum/Tech to Value/Industrials?

by Conor Sen

In a past life I was primarily a technical analysis guy. Now I’ve mostly gone in the opposite direction, but I still find charts helpful to see what’s actually happening and to test out if our fundamental/tops-down views are being validated or refuted by the market.

We’ve been of the view for awhile that momentum/growth/tech factors were over-extended relative to value factors, and have been waiting for those to reverse. Given the large market cap weightings of large tech stocks we expected that this reversal would put pressure on the overall market just from a cap weighted/arithmetic/deleveraging standpoint, but ultimately was what we’d need if some of our value positions had a chance of working. From that standpoint, this week’s losses were well worth it. The hope is that this churn and change in leadership is ultimately a sign that markets won’t continue to head straight down, but are building the foundation for something new/different.

The best news of yesterday was the severe underperformance of momentum tech growth names.

MTUM/VLUE got crushed:

As did QQQ/SPY:

Even within tech, the “safe tech” of the S&P 500 outperformed the riskier/momentum names in the Nasdaq 100, continuing a YTD-long pattern:

It may be confusing to see consumer discretionary get crushed on a strong wage growth print, except for the fact that the XLY ETF is loaded by popular momentum names like AMZN, HD, MCD, NKE, and SBUX, all of which got crushed with its momentum peers yesterday.

While MTUM/VLUE may just now be reversing, small cap value has been outperforming small cap growth for awhile:

There are no safe stocks, only safe prices – people rushing for the “security” of consumer staples may be forced to learn this lesson:

Same goes for utilities:

Two of the most promising signs of yesterday were the extreme outperformance of the materials sector:

And the industrials sector. This was not a run of the mill “risk off” day:

The Dow outperforming the S&P so strongly has a lot of information embedded in it. It’s loaded with a combination of value stocks, industrials, large caps, and “defensives.” The part I trust is the value/industrials portion, whereas technical/macro bears would probably lean more towards value/large cap/defensives.

And finally, small caps continue to underperform.

If we’re to break this bear panic and enter into a new sustained bull market what I’d like to see would be outperformance by small caps, financials/housing, industrials, maybe energy/materials, and “value factor” more broadly, with tech, expensive consumer staples/utilities, and “momentum factor” underperforming. Yesterday was a sign that some of this transition could be underway, and while tech/momentum deleveraging may be nowhere near complete gives me hope based on market factors for the first time in awhile.