NASDAQ Composite Index (NASD.I) & iShares S&P 500 Growth ETF (IVW) vs. iShares S&P 500 Value ETF (IVE)

It has been a choppy week for equity markets. Earnings season has come to an end, reducing the amount of corporate news out there for investors to consider. Instead, investors have turned their focus to rising traded US interest rates, particularly the 10-year treasury yield climbing above 10%, as a sign that the massive central bank liquidity party may not go on forever.

In light of the prospects that monetary policy may eventually need to normalize, investors have started to take profits in some of the areas which had led the charge upward initially and may be priced more closely to perfection, particularly in the technology and communications sectors which dominate the NASDAQ.Meanwhile, with the rollout of vaccines in the US set to accelerate and Texas planning to fully reopen next week, the prospects for a reopening recovery continue to grow which has maintained support for commodity prices. As a result of this, capital has continued to rotate into the Energy and Materials sectors and other industry groups which been severely impacted by COVID related shutdowns.Economic conditions remain a key focus for investors this week with US nonfarm payrolls due on Friday. Next week, the spotlight turns back to central banks and their plans for monetary policy with the Bank of Canada and the European Central Bank holding meetings.

In this week’s issue of Equity Leaders Weekly, we look at yesterday’s downturn in the NASDAQ Composite Index and at a shift in the capital flows between Growth and Value stocks.

With its higher weighting to sectors which have been among the early momentum leaders such as Technology, Internet and Communications, and sectors which have shown more strength lately such as Regional Banks, the NASDAQ had performed very well, leading the charge upward from the March 2020 market bottom.

Recently, however, sentiment toward NASDAQ stocks has started to change with investors taking profits in groups which had led the initial charge and redeploying capital into previously lagging groups now playing catch-up. A recent breakdown in the NASDAQ Biotechnology Index (NBI.I) suggested that investor aggressiveness may be easing somewhat.

The NASDAQ Composite Index (NASD.I) peaked in February and has been rolling over in recent weeks. Yesterday it staged a major technical breakdown, taking out the 13,000 round number and completing a bearish Triple Bottom pattern.

Next potential downside support for NASD.I appears near 12,400 based on a horizontal count, then 12,000 where a round number, horizontal count, and previous breakout point cluster. Initial resistance appears near 13,565 based on a 3-box reversal.

For many years, much to the jargin of value investors, the relative of growth versus value investing strategies has been heavily tipped in favour of growth. From time to time, value poked its head up briefly only to be knocked back down like in whack-a-mole. Recent trading suggests that a more sustainable shift in the relationship between growth and value may be underway with capital tactically rotating out of what may be fully priced growth names into value names as a potential catch up play.

The ratio between the iShares S&P 500 Growth ETF (IVW) and the iShares S&P 500 Value ETF (IVE) showed strong momentum in favour of Growth though 2018, 2019 and most of 2020. Growth’s upward momentum started to slow last summer and it peaked relative to Value back in September.

For the last six months, the tide has been slowly turning in the other direction with lower highs for the ratio indicating Growth losing its relative mojo. This week’s big Spread Triple Bottom breakdown completed a large rounded top and signals that the Growth/Value trend in

has turned decisively in favour of Value for the first time in several years.