E Growth Stocks Regained Momentum In The Past Week

There are several ways to assess the performance of growth stocks as a whole. I like to look at the ETF that tracks the Investor's Business Daily (IBD) Top 50 list. The ticker for this ETF is FFTY.

This list tends to contain a lot of outperformers in the markets, however, the ETF that tracks the list as a whole carries a fairly strong correlation with SPY. This can be seen in the weekly chart below that dates back to 2015.

FFTY with SPY overlay

The correlation highlights that these markets typically move in tandem, although the percentage gains in growth stocks, and most cases in FFTY, are much higher.

From time to time, there are divergences in this relationship. In the past, it has provided early warnings to a decline, and at times, an early signal for a prolonged bullish trend.

One example is the divergence in correlation that took place earlier this year. In early September, the S&P 500 broke to fresh record highs, albeit a marginal one. The ETF did not confirm this move but rather declined to a three-month low. SPY followed the move a few weeks later to give back a bulk of the gains from the August low.

An easier way to see this relationship is to chart the performance of FFTY against SPY which is what the chart below shows. It also has an overlay of SPY as a reference.

FFTY vs SPY with SPY overlay

To clarify, this chart shows how many shares of SPY it would cost to buy one share of FFTY in a candlestick format. Essentially, it takes the US dollar out of the equation.

What stands out in this relationship is the tops made in 2017 and 2018. In both cases, the ETF started significantly underperforming a few months before there was a sharp correction in SPY.

The price action in the relationship this year has been quite interesting. From the start of the year, the chart showed upward movement, which is not all that surprising as equities were very bullish. But a consolidation took place from February to August which followed by a downside break. If past price action is any indication of what's to come, that decline would be flashing a big warning sign.

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