Are Growth Stocks Ready For A Rest Or Just A Nap?

Growth stocks, notably the iShares Russell 1000 Growth (IWF) and Invesco QQQ Trust (QQQ), have significantly outperformed the broader market and value stocks since April-May lows, with IWF gaining 15% and QQQ over 14% compared to SPY's 11% and IWD's 5.5%. This growth leadership is strongly corroborated by technical indicators, including the NDX 100 Advance/Decline line and the IWF/IWD ratio, which has maintained a robust uptrend since late 2022, contrary to some early 2023 expectations for value outperformance. Despite minor technical divergences and potential short-term pullbacks, the overall technical outlook remains positive for continued growth stock leadership, showing no immediate signs of a major trend reversal.

Analysis

Growth stocks have been the definitive leaders in the market rally since the April-May lows, with the iShares Russell 1000 Growth ETF (IWF) and Invesco QQQ Trust (QQQ) posting substantial gains of 15% and over 14% respectively. This performance significantly outpaces the broader S&P 500's 11% gain via SPY and starkly contrasts with the iShares Russell 1000 Value ETF's (IWD) meager 5.5% increase. The trend is technically well-supported, as the Nasdaq 100 Advance/Decline line turned positive in late April and has consistently made new highs. Furthermore, the ratio of IWF to IWD, a key indicator of growth versus value leadership, remains in a strong uptrend well above its 20-month EMA, with weekly MACD indicators remaining positive and showing no signs of a major top. While a minor negative divergence appeared in the Nasdaq 100 A/D line in mid-August, it is not yet a confirmed sell signal and could be erased by a few positive sessions. Acknowledged headwinds include weak seasonal trends and low institutional cash levels cited in a BofA survey, suggesting potential for short-term pullbacks, but the dominant technical picture remains bullish for growth.

Key Decisions for Investors

• Investors should consider maintaining an overweight allocation to growth-focused ETFs, such as IWF and QQQ, given their demonstrated outperformance and strong underlying technical momentum compared to value and the broader market.
• Monitor the Nasdaq 100 Advance/Decline line closely; a confirmed drop below its recent lows would be the primary technical indicator signaling a potential shift into a corrective phase for growth stocks.
• Be prepared for near-term volatility due to weak seasonal patterns and low fund manager cash levels, which could present tactical opportunities to add to growth positions during any potential pullbacks.