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Why the bears are winning

Bulls vs bears, growth vs value – who is winning in this market?

The Australian market on a short-term basis has refused to shift from being bearish to bullish.

Its red 10-day trend line remains below its blue 30-day one. Also, its momentum oscillators (two charts below the main one) remain directionless.

By contrast the US share market on a short-term framework remains bullish, notwithstanding a slowing of its momentum oscillators.

Note how the Australian and American stock price indices move in sync even though our index is less upbeat than America’s.

An interesting feature of this market crash is how growth stocks fell by less than value stocks. Some analysts put that down to growth stocks being pitched at post-pandemic earnings potential while value stocks focus more on current earnings, but I’m not sure that is correct.

Below is a comparison of Vanguard’s red Global Value Fund (VVLU ) with its blue Global Growth Fund (VDHG)  which are both listed on the ASX. The better performance of the growth fund versus the value one during this crash is stark.

Value stock funds have performed worse than growth stocks since the GFC. See next chart. Notice that in the past when one style of investing got too far ahead of the other style there was a reversal of fortune.

Growth versus Value Stock Funds

But during this bear market, growth has reinforced its winning edge over value. See next chart.

Latest Growth Fund advantage over Value Funds (April)

Observe how the worlds’ top 100 listed multinational companies fund (IOO) (blue) have done better than a global diversified share market fund (IWLD) (red). Both these funds are listed on the ASX.

Clearly investors think the world’s biggest companies can withstand an economic shock better than a broader range of companies in the developed world.

Of course, what really matters in this crash is not growth or value but the strength of a company’s balance sheet (i.e. low debt and high cash reserves) so it can weather a possible prolonged economic slump.

A bear market survival is more important than a company’s share price relative to earnings. And survival is about the standing of a company’s balance sheet, management and competitive advantage and its post-pandemic growth prospects.

As always this is an analysis of what the market is actually doing, not where it’s going let alone trading or investment advice.