Size is more important than style! | RRG chart

something strange

Or at least something unusual is happening.

The tails of the DJ US Value Index and the DJ US Growth Index are shown against the DJ US Index in the relative rotation graph above. Typically we see a very gradual rotation in the opposite direction, which helps us understand and track the direction in which money moves from growth to value and vice versa.

Until about a week ago, the tail of the upper RRG was moving very clearly and gradually in the opposite direction. And suddenly there was a nearly vertical ring tracing the previous part of the tail.

If you switch to the daily RRG and zoom in on that movement, you’ll see that there was an actual clockwise rotation (there always is), but it’s so fast that it’s only visible on more detailed charts. These larger rotations, i.e. higher levels such as asset classes, styles, macro rotations, etc., usually take time to move through the cycle. Not this time…

Mag7 Pullback does not lower the market.

We’ve all heard and/or witnessed the sudden stagnation of Mag7 stock, and even though Mag7 stock fell altogether, the market ($NDX) ended the day in positive territory. Interesting situation! This means that no money from Mag7 stock has left the market. If that were the case, the entire market would have fallen as well. But rather, it was redistributed to other sub-stocks in the market. Money is rotating from Mag7 to other stocks in the same sector/sector.

Showing the rotation of large/mid/small cap sectors, RRG perfectly visualizes that rotation. Large Cap ($DJUSL) is moving from bullish to bearish and moving towards negative RRG. The internal improving mid-cap ($DJUSM) and the lagging internal small-cap ($DJUSS) have turned their tails towards positive RRG and are accelerating, as can be seen by looking at the RRG velocity, and the distance between them. Nodes in the tail.

So far it’s not an odd spin, but when combined with the style hook in the RRG above it becomes an “unusual” spin.

Size rotation is an overwhelming style.

What’s going on internally becomes clear when we load RRG, which sorts style indices into buckets of various sizes.

Note the DJ Value Large and DJ Growth Large indices (pointing arrows) in the RRG above. They are both moving in the negative RRG direction.

Also look at $DJUSGS and $DJUSVS inside the trailing quadrant. Both small-cap value and small-cap growth are on the rise. The same goes for mid-cap value and mid-cap growth within the improving quadrant. Both are rising and moving in a positive RRG direction.

So while value and growth stocks are moving in the same direction regardless of market cap, the markets ($DJUS, $SPX, $NDX, etc.) continue to rise.

So the bottom line is that money is currently rotating from large-cap to mid- and small-cap stocks and is doing so regardless of style (value growth).

Although the market is still trending upward, this means that participation in the uptrend is expanding, which is a good thing.

Although we doubt we will be able to keep up with the current pace and may face some difficulties, the long-term trend in the market remains on an increasingly strong basis.

Happy holidays and a great start to the new year in downtown Seattle. –Julius