“Skate to Where the Puck is Going, Not Where it Has Been” - Chaikin Analytics

“Skate to Where the Puck is Going, Not Where it Has Been”

The quote that is the title of this post is attributed to Wayne Gretzky, arguably one of, if not, the best hockey players of all time. What was amazing about Gretzky and the career statistics that he amassed as a player was that he did not stand out in any category that would lead you to believe that he would go on to earn the nickname “The Great One.” He was not the fastest skater, did not have the hardest shot and no one would call out his size as being something to fear.
Kris Krüg [CC BY-SA 2.0 (https://creativecommons.org/licenses/by-sa/2.0)]

What set Gretzky apart was his uncanny ability to see the entire ice and quickly notice when play was shifting. This allowed him to move to where the puck was going not where it had been. It allowed him to persistently be in the right place at the right time. Now this was not always the case, but more often than not, The Great One was where he needed to be to make the most of his time on the ice.

Investing is much the same. Trends in the market tell us where the “puck” is going and is likely to continue to head. But the market does not trend in the same direction in perpetuity. Eventually the players shift and the “puck” shifts with them. Being able to spot these shifts as early as possible allows investors to skate to where the “puck” is likely going next.

One of the big shifts in the market that could be beginning is the move to Value from Growth. Using a composite of Growth ETFs and Value ETFs, we can see how this shift is taking place. For each group, we use large, mid and small cap funds and build a ratio chart to see the relative trend for Growth vs Value. Since December 2016, we can see that Growth has been the place to be, steadily outperforming Value. After making a new high in August 2019, the ratio has begun to move lower, indicating that Growth is now underperforming Value.

The goal for investors is to determine how likely this new trend is to persist. Looking at the individual funds we can start to make that determination. There are six funds that were used to build the composite ratio above:

IVW: iShares S&P 500 Growth ETF; Bearish Power Bar Ratio
IWP: iShares Russell Mid Cap Growth ETF; Bearish Power Bar Ratio
IWO: iShares Russell 2000 Growth ETF; Bearish Power Bar Ratio
IVE: iShares S&P 500 Value ETF; Bullish Power Bar Ratio
IWS: iShares Russell Mid Cap ETF; Bullish Power Bar Ratio
IJS: iShares S&P Small Cap Value ETF; Bullish Power Bar Ratio

The line on the chart represents the Growth funds, taken together, relative to the Value funds, also taken together. When the line is rising, Growth is leading Value.

Looking at these six funds, we can see that all three of the Value ETFs have a Bullish or better Chaikin Power Gauge ETF Rating. For the Growth funds, only one (IVW) has a bullish rating, while the other two have neutral ratings. Additionally, all of the Growth funds have bearish Power Bar Ratios which means that when we look at the holdings of the funds, there are more bearish stocks than bullish stocks based on our
20-factor model. For the Value funds, the complete opposite is true.

Wayne Gretzky was not guaranteed to score a goal in every game that he played but skating to where the puck was going greatly increased the odds that he would. Likewise, the Growth to Value shift in the market is not guaranteed to persist but based on the ETF Rating and the Power Bar Ratios, the puck does appear to be heading in that direction.

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