U.S. stocks have rallied so far this year, mostly led by mega-cap growth stocks, but the situation could change in the third quarter, according to Jonathan Krinsky, managing director and chief market technician at BTIG.
The large-cap S&P 500
SPX,
and the tech-heavy Nasdaq Composite
COMP,
have gained 14% and nearly 30% so far this year, respectively, while the small-cap Russell 2000
RUT,
which is made up of the smallest 2,000 companies in the broader Russell 3000 by market capitalization, rose only about 7% over the same period, according to FactSet data.
“As we head into a new quarter, we think the odds of a significant mean reversion in the value vs. growth trade are quite high,” as the yield of 2-year Treasury
TMUBMUSD02Y,
on Thursday surged to the highest level since early March, Krinsky wrote in a Thursday note.
Mean reversion refers to an assumption that assets’ prices will tend to revert to the long-term average over time.
This divergence between growth and value stocks will likely resolve “with value moving a bit higher and growth moving meaningfully lower,” noted Krinsky. “Essentially, this also suggests that small-caps vs. mega-cap growth should have some decent upside reversion.”
Meanwhile, the technical set-up remains for a “more significant broad-based selloff” in U.S. stocks later this year, Krinsky noted.
The COBE 6-month implied correlation, an index measuring the average expected correlation between the top 50 stocks in the S&P 500 index, is at the lowest level since 2006.
“Rising correlations should be anticipated in the coming months,” Krinsky wrote. Rising correlations typically correspond with falling equities.
U.S. stocks traded mostly higher Thursday, with the Dow Jones Industrial Average
DJIA,
up 0.6% and the S&P 500 up 0.2%. The Nasdaq Composite fell 0.2%, according to FactSet data.
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