MRA Technical Corner #2

Posted by Shane Murphy on Mon, 07/12/2021 - 17:12

Q2 2021 is in the books. We enter the month of July with US equities trading at all-time highs, interest rates forming multi-month lows, and volatility returning to pre-pandemic levels. The current news narrative is centered around inflation and whether the Fed’s “transitory” stance is likely to be true or not. Despite this narrative, last quarter long-term US treasury bonds formed multi-month highs. All this talk about inflation and we’re seeing t-bonds print new highs? It’s always interesting when the narrative runs counter to actual price action. We’re not attempting to speculate on the direction of t-bonds - We are simply pointing out that often headlines and price action tell two very different stories. Below is a chart of US Treasury Bond futures alongside the 14-period Relative Strength Index.

Growth vs. Value

With interest rates falling and the yield curve beginning to flatten, high quality US growth names saw a boost in performance. The areas of the market which outperformed to start the year (smallcaps, value, financials, energy etc.) took a backseat to Mega-cap leadership. Year to date as of July 10th, S&P 500 Growth is outperforming S&P 500 Value by 23 basis points. Why do we bring this up? Because in this type of environment, it pays to have a blended equity allocation. The question should not be, “do we invest in Growth or Value?” Rather, “do we own both Growth and Value?” There are attractive areas within both factors. Having a dogmatic approach to one factor is not recommended and can weigh on long-term returns. Stocks that are deemed “growth companies” can develop into what investors would consider a value stock. Why limit yourself to one or the other?

Market Breadth

When it comes to market breadth, the Advance-Decline Line (AD Line) is a great indicator. The AD Line calculates the number of advancing stocks less the number of declining stocks of a particular index. The AD Line is a cumulative measure of Net Advances, rising when it is positive and falling when it is negative. Below is a chart of the Nasdaq Composite and its AD Line. A divergence emerged on June 29th and remains as of the date of this post. Although the composite made new all-time highs, the AD Line is struggling to surpass its most recent peak. This datapoint is notable, but for now that’s all it is – notable. Q2 saw strong relative performance from mega-cap technology, this chart outlines the fact that although the mega-caps are pulling the broad market higher, participation from lesser weighted names is declining. Whether or not the AD line is foreshadowing a reversal in the index is unclear, but it is certainly something to keep an eye on.

Market Breadth (continued)

We find it important to share this next chart displaying the S&P 500 Index versus an equal weight version of the index (blue line). The left-side displays the ratio during the Great Financial Crisis, subsequent 2009 bottom and the first few years of the financial cycle’s recovery. The right-side depicts the ratio during the 2020 COVID crash up until the date of this post. When the ratio (blue line) is trending down, the equal weight index is outperforming. The first few years following a major stock market bottom, often consists of wider participation within the indices. This is only a snippet in time, but if we’re to see a similar environment within the 2nd year of a recovery, one should expect equal weight indices to outperform. If we begin to see the opposite, it is not necessarily a net negative for stocks, but it may signal a slowdown in the economy and hint toward where we are in the current cycle. When it comes to incorporating technical analysis into investor decision-making, a weight of the evidence approach is best. This is only one datapoint, but an interesting one, nonetheless.

US Equities

Earlier this month, the US celebrated Independence Day. During that same week, the S&P 500 relative to the FTSE All-World Ex. US Index made a new all-time high. Quite the way to commemorate the birth of our Nation! It wasn’t too long ago that US equity underperformance was in full focus, as other developed nations more heavily weighted in financials were outperforming. Below is a chart of the S&P 500 vs. FTSE All-World Ex. US Index and the ratio’s 200 day moving average. Even though international equities are more attractive from a valuation standpoint, the recent surge in mega-cap technology has boosted the benchmark US stock index to new absolute and relative highs.

ETF Flows

We continue to see strong risk appetite for stocks as first half equity inflows reached the largest level ever recorded. Money is piling into stocks; this can be viewed as either a bullish or bearish data point (depending on the investor’s larger macro view). June flows were also very notable, as the largest estimated inflows occurred within the Large Blend and Large Growth Morningstar category. A big change from the month of May as leaders included Large Value and Intermediate Core Bond, while the biggest laggard was Large Growth showing -$10.2 billion in outflows.


In the equity market, three months is a very long time, a lot can change. This past quarter is a great example of why diversification is so important and why a blended equity approach will pay in this type of environment. As the Growth vs. Value debate heats up, it’s those investors with exposure to both factors who come out victorious. If we learned anything this quarter it is that headlines do not drive prices, fundamental factors do. It would do all of us some good to turn off the news every once in a while, and focus on what matters - Price!

This material is intended for informational/educational purposes only and should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. All indices are unmanaged and investors cannot actually invest directly into an index. Unlike investments, indices do not incur management fees, charges, or expenses. Past performance does not guarantee future results.Please contact your financial professional for more information specific to your situation.

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