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Stocks Break Out, Growth Outpaces Value

David Becker
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Stocks Break Out, Growth Outpaces Value

The major stock indices surged off support levels last week and followed through with breakouts this week. The S&P 1500 hit new highs in November-December, consolidating into January and breaking out in February. Overall, a triangle took shape and this is typically a continuation pattern. With the prior move up, the February breakout signals a continuation of the long-term uptrend. It is difficult to pain a bearish picture as long as the majority of these indices hold their breakouts. Of the five indices, the S&P Midcap 400 and Nasdaq 100 hit new highs first and they are the clear leaders.

Data recently has been mixed, with jobs showing signs of gaining momentum, while declining gasoline prices have yet to spill over into retail sales. Wednesday softer than expected inflation and housing data will likely lend itself to keeping the Fed on hold during the first half of 2015.

In general, the stock market is in risk-on mode when growth outperforms value, mid-caps outperform large-caps and small-caps outperform large-caps. By comparing the Russell 2000 Growth iShares (IWO) to the Russell 2000 Value iShares (IWN), the upward trajectory of the spread reflects increasing interest of growth over value. In other words the Russell 2000 Growth iShares is outperforming the Russell 2000 Value iShares. If nothing else, the takeaway here is to prefer growth over value.

The technical picture for the spread between value and growth is positive. The MACD (moving average convergence divergence) index recently generated a buy signal. This occurs when the differential (the 12-day moving average minus the 26-day moving average) crosses above the 9-day moving average of the differential). The index moved from negative to positive territory confirming the buy signal. Additionally, the relative strength index (RSI) moved higher with price action reflecting accelerating positive momemtum.

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