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.

And it may well still be doing exactly that. After all, this chart has been trending lower since it peaked in June last year. But this relationship seems to have found some ground and has shown strong upward momentum over the past week. It happens to be doing this from the same point that it reversed at the start of the year.

As a rule of thumb, I'm much more comfortable being long equities when the ratio between FFTY and SPY is bullish. For the moment, it is doing exactly that. Further, FFTY posted a strong upward weekly candle, hinting that this might just be the start of a bigger move.

Over the weekend, I posted an article on TalkMarkets which builds towards the case for a long bullish trend in equities because of technical developments in correlated indices across the globe. With this view, I think it is critical that growth stocks regain momentum. What's happened over the past week is certainly encouraging. I probably would not have such a strong conviction in my bullish view if it didn't. But it would be good if this momentum builds further over the next couple of weeks.

Aside from small nuances providing a potential signal in this ratio, I think the recent divergence is also important. FFTY diverged from SPY in a major way in September and has not quite converged yet. If the broader four-year correlation between these two holds true, a low-risk play might be to position for a convergence in the correlation.