The relative rotation graph showing the rotations of the uppercase, medium, and low indexes sends a very clear message: Avoid capitalization. (And also capital letters).
The large cap segment pushes further toward the main quadrant, while the small caps lie in a very long tail that moves deeper into negative territory. It looked as if the queues of medium and small capital letters were coiled back and on their way to the main quadrant to continue their relative upward trend during the months of May and June. Meanwhile, the capital letters tipped inward, improved, and headed backward.
This situation changed 4-5 weeks ago, when small capital letters quickly began to accelerate to and from the backward quadrant, followed by capital letters. At the same time, the capital letters picked up the pace again and now moved on to the main quadrant.
While not a “hard rule,” it is generally a weak signal to the market when small capitalizations (quickly) deteriorate. In bullish markets, investors are happy to invest in small businesses looking for the next 10 or 100 bags. However, when the situation becomes difficult, many of them return to well-known names, usually large or even mega-caps, as a “safe haven.”
The Value-Growth relationship sends a conflicting message at this point. Since the beginning of 2021, the DJ US Value Index has moved to the right of the RRG (and the growth index), indicating a preference for Value shares. In general, this is a situation that is considered “weak” for general markets, as large rallies are derived mainly from the behavior of growth stocks.
If we extend the queues to a maximum of 30 weeks, we see that the real difference in performance between these two segments is negligible, 17.2% versus 17.1%. Therefore, we must conclude that the relative trend in value was only marginally better throughout this period. Only during the first months of the year was the value really in much better condition than growth, but the latter has recovered quickly and the two are now at very similar levels of performance.
Given that SPY managed to add similar gains during the same period, not much could be gained from Alpha playing Growth or Value unless it changed in late May.
Break down growth and value in size.
Combining both RRGs into one gives the image above. This graph contains the growth and value indices and size indices of the previous RRGs. But it also adds the large, medium, and small capitalization segments for growth and value, which provides a much more granular view of where market-relative performance lies.
Looking at the table below the RRG, you can see that the red back quadrant is dominated by the uppercase index and all sizes of the Value segment. The green quadrant, leader, maintains large growth and capitalization indices, and medium and large capital growth variants. The only growth index missing is the small capitalization growth index, which is far to the left, just within the improving quadrant, but with the lowest reading of the RS ratio. This tells me that the small capitalization component of the growth segment is lagging behind the overall improvement visible for overall growth.
The uppercase and uppercase values are overdue and go lower on both axes. On the other hand, the growth of small caps is improving on the inside, but with the lowest level of RS-Ratio, which means that there is a good chance that the tail will turn before hitting the main quadrant.
However, a rather negative reading for the whole universe of small capitalizations. As long as this situation continues, I keep my guard regarding SPY’s ability to move forward considerably. The current risk (imho) does not exceed the upside potential at this time.
#StaySafe and have a great weekend, Julius
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Julius de Kempenaer
Senior technical analyst, StockCharts.com
Creator, Graphs of relative rotation
Founder, RRG Research
Host of: Focus of the sector
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