Trading Places with Tom Bowley

Does A Bull Market Depend On Leadership From Growth Stocks? You Might Be Surprised


My favorite ratio to watch in order to gauge the market's appetite for growth stocks is the Russell 1000 Growth ETF vs. the Russell 1000 Value ETF (IWF:IWD). When this ratio is moving higher, we want our portfolio to be weighted more toward growth. When the opposite is true, then a more conservative approach works best. But one very key point I'd like to make is that either growth stocks or value stocks can lead a major bull market rally. Don't be misled by recency bias. Look at this 10 year weekly chart of the IWF:IWD:

The green shaded area shows very strong positive correlation between (a) the direction of the IWF:IWD ratio and (b) the direction of the S&P 500. So those looking only at the past 2-3 years would likely draw the conclusion that the S&P 500's bull market rally needs leadership from growth stocks. But by taking it another step further and using a look-back period of 10 years, you can see that the red shaded areas show two major bull market rallies supported by a declining IWF:IWD ratio. That tells us that value stocks led that phase of the bull market.

My conclusion? Remain objective. I believe that 2020 will be a very strong year for U.S. equities, but I'm not so sure just yet as to which group leads.

While it's not perfect by any means, we should pay attention to how financials (XLF) and industrials (XLI) perform on a relative basis vs. the benchmark S&P 500. As you can see in the chart below, these two sectors tend to perform much, much better during periods of leadership from value stocks (ie, when the IWF:IWD ratio is declining):

The correlation in the case of both XLF:$SPX and XLI:$SPX are both mostly negative, or inverse. That means each of those sector's relative performance tends to move opposite the direction of the IWF:IWD.

We have yet to see whether the IWF:IWD breaks out again, but if it doesn't, it's noteworthy that the XLF:$SPX ratio is beginning to surge. I have said previously that I believe financials and industrials could be major beneficiaries of another bull market advance in 2020, but the odds of such relative strength could be somewhat dependent on a declining IWF:IWD ratio. Food for thought.

Special Free Event Today with Arthur Hill

On a separate note, I'm really excited to have Arthur Hill join later this morning at 11am EST for his Market Vision 2020 mini-series event, "Narrowing Your Universe With A Robust Scan". Arthur plans to show you his two strategic technical indicators that allows him to uncover consistent and persistent uptrends. It should be a great event and very educational!

If you've registered for the Market Vision 2020 newsletter, which is completely free, then you received instructions for joining Art's event in this morning's newsletter. If you haven't registered, you can join the event by using the link below, and we'll get you registered for this newsletter:

Registered newsletter subscribers will be eligible for free giveways, mini-series events like the one today, speaker profiles (including fun facts about each speaker), and updates on the main event, Market Vision 2020, which will be held on Saturday, January 4, 2020. It's an online event, which means you can enjoy it from the comfort of your own home, or wherever you'd like to watch it. Early bird pricing is currently in effect, so don't miss your opportunity to save now! Just being a free newsletter subscriber will save you $20 off the regular price of the event!

I hope you can join Art for this free educational event. The room will open at 10am EST and the event will start at 11am EST. For those who can't make it live, we'll have a recording available for you as well.

Happy trading!


Tom Bowley
About the author: is the Chief Market Strategist at, where he provides stock market education, guidance, and trading strategies using a unique combination of technical, fundamental, and historical analysis. Tom provides members with four portfolios (Model, Aggressive, Income, and Value), all designed to beat the benchmark S&P 500, and a revolving Watch List of hundreds of companies reporting strong quarterly earnings (must beat both revenue and EPS estimates) and exhibiting technical strength as well. These companies comprise EarningsBeats' annotated Strong Earnings ChartList (SECL), from which Tom trades exclusively. Tom writes a Daily Market Report (DMR) for members to include an executive summary, market outlook, sector/industry watch, and trading ideas. Learn More
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