Tactical Update: Long-Term Trends

Note: There are a lot of charts in this post. That doesn’t mean that we are technicians. We use charts because we are primarily interested in trends, especially long-term, big-picture trends. And charts are the easiest way to present that information. In general, you will want your tactical adjustments to respect the long-term trend. There are times when it makes sense to position for a reversal but only at extremes.


S&P 500

The trend here is pretty obvious, although there was certainly reason to think it might be changing back in March. A couple of things to notice here. Volatility has increased considerably since 2018 and that can be seen as a loss of momentum. Or maybe a loss of the consistency that prevailed from 2012 to 2018. Another observation is that the current price is well above the 50-month moving average. A moving average is just a way to smooth out the ups and downs, a representation of the long-term trend. This is one of those extremes where it is starting to make sense to look for a reversal. A fall to that rising 50-month average is a little over 20%. Not necessarily a bear market but painful nonetheless. And that will happen at some point. With sentiment so bullish, the contrarian in me thinks it could be soon but there is no way to predict the timing. And no, I have no clue what might trigger such an event. Neither does anyone else. As a famous seer once said, “impossible to see the future is” (Yeah, I’m a big ol’ nerd.). We are currently underweight the S&P 500 on a tactical basis.

Growth vs Value

This bull market has been led by growth stocks, which is what we would expect from a strong dollar environment. This is a ratio chart of the S&P 500 growth ETF (IVW) versus the S&P 500 value ETF (IVE). A rising ratio means growth is outperforming value.

The outperformance of growth started to accelerate in 2014/15 when the dollar surged higher.

IVW Total Return Level Chart

IVW Total Return Level data by YCharts

The surge in growth stocks relative to value during the virus has been extreme:

IVW Total Return Level Chart

IVW Total Return Level data by YCharts

This is another trend that has reached an extreme and seems likely to reverse at least back to the previous trend slope. If we look at it from the viewpoint of value (IVE:IVW), it is easier to see the potential rebound. Moving back up to the previous trend would require erasing growth’s outperformance of this year. I am pretty confident that will happen but don’t know-how. Value could mark time while growth falls 30%. Or value could rise while growth marks time. Or, most likely, some of both. Whether the long term actually changes to favor value is not a question that even needs to be asked yet. We are currently overweight value versus growth to capture the rebound.

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Disclosure: This material has been distributed for informational purposes only. It is the opinion of the author and should not be considered as investment advice or a recommendation of any ...

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