So far in 2024, the stock market environment has been one in which the strong get stronger and the weak get weaker. The best-performing stocks have made a consistent series of higher highs. And, the worst performers keep falling to lower lows.
The S&P 500 is up 17% so far this year. The Nasdaq 100 is up 24%.
The Technology Select Sector ETF (XLK) has gained 22%. The VanEck Semiconductor ETF (SMH) is up an average of more than 50%.
Meanwhile, the Russell 2000 (IWM) is just barely positive on the year. The iShares U.S. Transportation ETF (IYT) is flatlining.
More New Lows Than Highs…
More stocks are hitting new 52-week lows than new highs. And the difference in performance between growth stocks and value stocks has stretched to its highest level since late 2021 – just before the difficult market environment of 2022.
Take a look at this chart comparing the S&P 500 growth fund (SPYG) to the S&P 500 value fund (SPYV)…
When this chart is moving higher it indicates growth stocks are outperforming value stocks. When the chart is moving lower, value is beating growth.
Growth has been firmly in control since the start of 2023. And, the outperformance of growth over value has exploded higher over the past three months.
The chart has now gone parabolic.
Notice, though, how the momentum indicators at the bottom of the chart have been lagging the recent rally. While the ratio chart has made higher highs, the indicators are making lower highs.
This sort of “negative divergence” is often an early warning sign of an impending decline.
That means, growth stocks are likely to fall or value stocks are likely to rally, or some combination of the two.
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The Rubber Band
In other words, the proverbial rubber band for the growth sector is overstretched to the upside. It’s vulnerable to a decline. And, the value stock rubber band is overstretched to the downside. It’s set up for a rally.
The last time we experienced that sort of “snap-back” action in the market was back in 2022. That’s when everyone’s favorite, best-performing stock of 2021 – Tesla (TSLA) – dropped from $400 per share to just over $100.
Some of the stocks that lagged the market’s gains in 2021 – like ExxonMobil (XOM) and Archer Daniels Midland (ADM) – gained 90% and 50% respectively as the broad stock market fell in 2022.
If we see something similar this time around, then the leading stocks so far in 2024 are likely to struggle through the end of the year, and the lagging stocks are set to play one heck of a game of “catch-up.”
Given the parabolic look to the previous chart and given the negative divergence on the various momentum indicators, that game should begin soon.
Best regards and good trading,
Jeff Clark
Editor, Market Minute