Equity Leaders Weekly

Crude Oil Continuous Contract (CL.F) & iShares S&P 500 Growth ETF(IVW) vs the iShares S&P 500 Value ETF (IVE)

It has been a generally positive month for the equity markets overall in the month of July after a rough first half of 2022 for equity markets around the world. The markets have been fixated on how interest rate hikes will impact the economy and whether these rate hikes will push the economy into a recession or can the central bankers engineer a “soft landing” and avoid a recession.

In looking at the latest economic numbers, the Institute for Supply Management (ISM), reported its service sector index for July showed a reading of 56.7% which beat consensus forecasts of 53.5%. The July number also came in better than June’s number of 55.3%. Any number of 50 or better is seen as a sign of economic growth while any figure below 50 shows a contraction. However, the Employment Index also came in at 49.1% which is in contraction territory, so we are seeing some slowing momentum in the labour market however overall unemployment numbers remain low for the time being.

OPEC+ met Wednesday and a 100,000 barrel a day increase in oil output was announced which is a smaller increase than what was added in previous months. OPEC members seem to be concerned with the threat of a possible US recession in the makings due to its aggressive rate rates and the on again off again Covid 19 lockdowns in China which potentially causes headwinds in the oil demand outlook. Oil inventory numbers from the Energy Information Administration came out and the numbers show a surprise build of 4.5 million barrels last week versus a consensus for a draw of 600,000 barrels indicating a rather bearish report.

With the economy and the markets at an eternal tug of war battle between deciphering whether a “soft landing” can be achieved to reign in inflation or a recession potentially in the makings we are going to look at the Crude Oil Continuous contract (CL.F) as well as two competing investing philosophies of Growth and Value by looking at the iShares S&P 500 Growth ETF (IVW) vs the iShares S&P 500 Value ETF (IVE) for this edition of the Equity Leaders Weekly.

Crude Oil Continuous Contract (CL.F)

Now let us take a look at the Crude Oil Continuous Contract (CL.F) at a 5% scale on the Point and Figure chart for a longer term viewpoint. The last time we looked at Oil was back on the June 2 edition of the Equity Leaders Weekly when Oil was trading at $115.00. Since that time, we see a significant pullback has materialized in Oil with the last closing price at $90.66. From the end of the first quarter through to now the trend has shifted to a trading range of approximately $120.00 on the upside to $90 on the downside at the moment. At this point it is unclear if this is a pause within an ongoing uptrend or a major top forming.A close below $89.26 would signal the start of a new downtrend. Such a move would suggest that fears of falling demand have started to outweigh fears of a shortfall in supply. On a breakdown, next potential support appears near $73.44. To the upside, there is some resistance at $113.93 and above that, the top of the sideways consolidation range at the $125.60.With an SMAX of 5 out of 10, CL.F is not showing any strength against most asset classes. It will be interesting to see going forward if the recent weakness is Oil will materialize further or if the trend changes and the upcoming levels of support can be held. 

iShares S&P 500 Growth ETF(IVW) vs the iShares S&P 500 Value ETF (IVE)

Generally speaking, Investors tend to flock towards Value investing when economic conditions are fragile and migrate towards the Growth area during times of economic growth. Let’s look at these two competing investing styles to see how they have performed specifically since the beginning of the year when market volatility increased and the recent pullback in equity markets really started to take hold.  To further remind our readers, in analyzing a comparison chart, a rising column of X’s indicates the first symbol in our comparison, in this case iShares S&P 500 Growth ETF (IVW), is outperforming iShares S&P 500 Value ETF (IVE) while a declining column of O’s indicates the iShares S&P 500 Value ETF (IVE) is outperforming iShares S&P 500 Growth ETF(IVW) In looking at the comparison chart of IVW vs. IVE we see that for the last 11 years since 2010 until the end of last year there has been some pretty consistent relative outperformance of Growth stocks vs the Value area with only brief periods where the Value area outperforms specifically in spring of 2021. Since the beginning of 2022 when the markets started one of the worst first half performances in over 50 years we saw a brief massive rally where Value (IVE) outperformed relative to Growth (IVW) up until May of this year. This brief change in leadership only lasted for 5 months as we see most recently the Growth area is beginning to take over the leadership starting in June which has further materialized up until today.  IVW is currently at a resistance point vs IVE. However, at this point it is to early to say the trend has broken in favor of Growth Investing as the comparison chart is still below the long-term down trend line which will act as strong resistance going forward for Growth (IVW). It will be interesting to see going forward if the Growth area can gain more traction vs its Value counterparts and further advance its early stages of leadership.Intuitively, in a rising and extended bull market one would expect to see Growth outperform Value while in market pullbacks and instability Value outperforms Growth. This raises the question of where we are at in this relationship cycle. Are we at just a  short term trend of rising X’s where growth’s resilience over value reaffirms itself or can this change in trend material further.

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