Growth vs. Value: What Does Technical Analysis Tell Us?

April 08, 2016

Technical analysis enables speculators to make future market predictions based solely upon a charted historical past; the actions of the market are studied as opposed to the underlying fundamentals of a company. Analysts have studied these sorts of charts for years and in the process discovered trends that are believed to support specific future behavior. One of these trends is explored in this week’s chart as it applies to the market’s preference of style: value vs. growth.

Typically, these trends are applied to a single stock’s movement, but for the sake of assessing the future return prospects of value and growth, we will apply them to the Russell 3000 Value and Russell 3000 Growth indices. More specifically, we calculate the return differential between the two indices by subtracting the Russell 3000 Growth index from the Russell 3000 Value index. This differential is smoothed by using a 90-day moving average and indicates value’s outperformance versus growth when above 0. The 200-day moving average is used as an alarm to changing trends; if a stock price, or in our case a shorter period moving average, breaks upwards through the 200-day moving average, this is seen as a bullish sign, or in our case the outperformance of value over growth. The opposite can be said if our differential breaks through this line downwards. As pictured, value broke through its 200-day moving average line in November, suggesting its future outperformance over growth, which it has recently delivered.

Bollinger Bands, portrayed in green and blue, represent 2 standard deviations above and below the 200-day moving average. It is generally thought that breaking this upper band signifies the security is overbought, which in our case would suggest a trend reversal in growth’s favor and that perhaps, value’s brief period of outperformance is over. With sectors like Healthcare and Tech rallying lately — up 1.3% and 0.9% respectively in March — growth may truly be back in fashion. Given the oscillating nature of the differential, however, this may be a true case of ambiguity in which value and growth have yet to battle it out.