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Growth Correction Over

Kevin Cook

Welcome to May... a great month to buy stocks! For a few weeks I've been talking about the divergence of growth and value, small and big, risk and safety.

And now it looks like the big question I posed two weeks ago in Buy in May?, about whether the small caps lead the big ones lower, or vice versa, is being resolved.

My bet is that the growth indexes, Nasdaq and Russell 2000, can retrace at least 50% of their March-May declines as the S&P grinds up to 1940. Here's an update of the IWM:SPY ratio chart I showed you on Friday...

This is just a 1-year chart to highlight the extreme "dislocation" move with Bollinger Bands, so it doesn't show the 2011 and 2012 lows in the ratio of 0.56.

Over the weekend, I stumbled across some great stats on recent instances of this IWM vs. SPY dislocation. Michael Batnick's blog, The Irrelevant Investor, is worth a read but here's the key summary of the historical data...

35 of 36 instances in the past 14 years in which the RUT dropped over 10%, the S&P followed with a 10%+ decline.

Some will surely think I am crazy to bet against this history, especially going into summer. Ahhh, I love when the crowd is already one-way about a big trade.

I am just trying to follow what I think large investors are up to. They ravaged growth stocks, and now they are picking up the valuable pieces, finding growth values in Tech, Financials, and even Biotech in an expanding US economy.

What do you think... Is this move toward new highs solid and sustainable, or is this just another bear scare and bull trap?

More importantly, what stocks are you buying and selling this month according to your outlook for the next 3-6 months?

Read the analyst report on IWM

Read the analyst report on IBB

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