Chart in Focus

While investor focus has been on the shift into the cyclical and value themes in the U.S. equity market, especially the smaller stocks tied to this theme, the S&P 500 Growth Index is not something that investors should ignore. Large cap growth traded to a new all-time high along with the S&P 500 yesterday after a successful test of support at the September 2nd peak. Importantly, during that test, the index did not become oversold based on the RSI indicator remaining above the 30 level. Perhaps even more important is the fact that relative to the S&P 1500 (a broad equity barometer), large cap growth appears to have bottomed and is now turning higher.

Key Themes and Relationships

With the S&P 500 trading at record levels, the trend is, by definition, to the upside. However, in an effort to not become complacent, we look at some of the important relationships that can give us a sense of the odds that the uptrend will persist and investor’s willingness to take on risk.

High Beta vs Low Volatility

When investors are bullish and want to add risk exposure to portfolios, it stands to reason that they will favor the stocks that have the potential to go up more than the overall market. When investors are cautious, the opposite is likely true as they aim to limit their downside. High Beta stocks are likely to outperform the overall equity market if the market’s trend remains to the upside. Low Volatility stocks can serve as a defensive position when investors become cautious. Looking at the relationship between the two can give us a sense of how investors are positioning.

The ratio of S&P 500 High Beta to S&P 500 Low Volatility is in an uptrend above the rising 200-day moving average after breaking out in November. The RSI of the ratio is in a bullish regime (recent lows have held the 40 mark), signaling that momentum remains with the bullish trend.

Consumer Discretionary vs Consumer Staples (Equal Weight)

Another way to gauge investor risk appetite is to look at the relationship between Consumer Discretionary stocks and Consumer Staples stocks. Logically, discretionary companies sell the products that we “want’ to have while staples companies sell the products that we “need” to have. When the “wants” are leading the “needs” it points to bullish expectations on the part of investors, and that is the case that is playing out now. The ratio of Discretionary to Staples is in an uptrend, above the breakout level at the 2018 highs and the 200-day moving average. The RSI is in a bullish regime and is moving higher after holding the 40 level.

*We use the equal weight indexes to account for AMZN’s large weight in the Discretionary sector.

Credit Spreads

When investors become cautious, the spread between bonds that are below investment grade will tend to widen relative to havens such as U.S. treasuries. The BoA Merrill Lynch US High Yield CCC or Below Option-Adjusted Spread looks at the performance of U.S. dollar denominated below investment grade rated corporate debt compared to a spot Treasury curve. In times of actual or perceived stress in the markets, this ratio will tend to rise. When the environment is calm and expected to remain that way, this ratio will normally decline. After spiking before and during the pandemic, the spread has been moving to the downside.

The bond market does not appear to be concerned right now.

While the relationships above give us a sense that investors remain risk seeking, pointing to increased odds that the bullish equity trend is likely to persist, the themes below can give us a sense of where investors are allocating capital within this bullish trend.

Growth vs Value

As mentioned above, growth stocks are breaking out on an absolute basis. The question that investors want to answer is “will growth outperform value?” The growth theme had been the leader from December 2016 until September 2020 when the tide turned, and value began to lead. The ratio has traded down to and held a support level but remains below the 200-day moving average. The move lower pushed the RSI to oversold levels, but this indicator is rebounding and on the verge of breaking a downtrend. Regaining the moving average will favor the growth theme while a breakdown will point to continued outperformance by value.

Small vs Large

Looking at the S&P 600 Small Cap Index relative to the S&P 500, we can see leadership on the part of small caps since November. However, in the near-term, that leadership is being tested as the ratio has pulled back to test support after becoming overbought. The RSI is now testing the lower bounds of a bullish regime near 40. The ratio is above the 200-day moving average, keeping the trend positive but there is a lot of resistance overhead.


Investors continue to show a willingness to take on risk as U.S equities move higher. Under the surface, the leadership dynamics are slightly less clear, as a battle is being waged between growth and value as well as between small caps and large caps.

Disclosure: This information is prepared for general information only and should not be considered as individual investment advice nor as a solicitation to buy or offer to sell any securities. This material does not constitute any representation as to the suitability or appropriateness of any investment advisory program or security. Please visit our FULL DISCLOSURE page.