How We Follow Trends

by JC Parets  -  May 24, 2019

There are trends people tend to pick up on indirectly. That’s usually by looking at individual stock charts or exchange-traded funds (ETF) on an absolute basis, seeing the relative strength or weakness, and connecting the dots.

See something in one chart, it may not be all that special… See it in a lot of charts from the same area of the market, you’re probably onto something. That’s the indirect way.

If we look at a trend directly, we can get a better feel for the exact strength of that underlying trend/theme.

Let’s talk about a few trends that I know people are aware of but may not totally appreciate for their severity.

First is the S&P MidCap 400 Index relative to the S&P 1500 Index. The MidCap 400 is breaking down to its lowest levels since early 2010. This action confirms a long-term top, perhaps signaling the start of long-term underperformance from the mid-cap segment.

Ten-year history of the performance of the S&P MidCap 400 Index relative to the S&P 1500 Index.

[Click to Enlarge]

Growth has been in favor for more than a decade. But not all growth is created equal.

Here’s the S&P Small Cap 600 Growth Index breaking an eight-year support level relative to the S&P 500 Growth Index.

It’s already fallen approximately 25% from its 2016 highs, and the rate of this decline looks ready to accelerate further after failing to reclaim support a few weeks ago.

Ten-year history of the performance of the S&P Small Cap 600 Growth Index relative to the S&P 500 Growth Index.

[Click to Enlarge]

There’s been a defensive posture to the market, particularly since the fourth quarter ofs2018. But not all cap segments of the consumer staples sector have worked equally well.

Small-cap consumer staples have underperformed their large-cap counterparts by 19% since mid- to late 2018 and remain in a clear downtrend.

Long-term comparison of the performance of the S&P Small Cap 600 Consumer Staples relative to the S&P 500 Large Cap Consumer Staples.

[Click to Enlarge]

Let’s look at the two subgroups on an absolute basis. Small-cap consumer staples are stuck below a downward-sloping 200-day moving average, with resistance at 74.50 to 75.00 and momentum in a bearish range.

Long-term performance history of the S&P Small Cap 600 Consumer Staples.

[Click to Enlarge]

Meanwhile, the large-cap consumer staples are pressing up against the top of their range and attempting to make new all-time highs.

Long-term performance history of the S&P 500 Consumer Staples.

[Click to Enlarge]

What a contrast… The difference is evident in the absolute charts. But the trend really comes to life when you plot the relative performance on one scale, as we did initially.

Utilities also see the same type of contrast; the group has underperformed by 20% since topping in the fourth quarter.

Five-year comparison of the performance of the S&P Small Cap 600 Utilities relative to the S&P 500 Utilities.

[Click to Enlarge]

If you’re an active market participant, you’re probably not surprised these trends exist.

I hope I’ve at least highlighted the value of reviewing trends in a direct manner every so often… especially if you’re in the business of delivering superior relative returns.

To wise investing,

J.C. Parets
Editor, Big Market Trends