Growth versus value investing remains one of the longest-standing debates among investors, analysts, strategists, money managers, and financial advisors. Growth and value stocks are the yin and yang of stock investing. Each offers widely different characteristics and caters to widely different investment styles. The post-Covid-19 recovery from the March 2020 bottom was fast and furious. It has heavily favored growth stocks for the past few months. But with the election concerns abating, economic uncertainties showing more clarity, and the global pandemic possibly moving toward some resolution, there appears to be a rotation out of growth, and into value stocks.
Yesterday's promising vaccine news may have ignited a rotation into economically sensitive value stocks at the expense of technology-driven stay at home growth stocks. The rotation continues today, as evidenced by the 10-year US Treasury (TNX), which has now cleared above its June 2020 reaction high (0.957%). The breakout establishes a higher-high pattern and suggests the potential for a continued rally to 1.266% (3/18/20 high). Rising interest rates will help support the rotation to value stocks and the Financial Sector. Energy (XLE), another major laggard for the past year, continues to benefit from this recent rotation with sharp gains of 3.24% today. Industrials (XLI), a cyclical related sector, is following up with yesterday's impressive gains with returns of 1.76% today. Small-Cap stocks are up again today, with both the Russell 2000 Index (IWM) and the S&P 600 Small Cap Index (SML) gaining 1.86% and 2.64%, respectively.
So, is the rotation for real? Will this be a sustainable rotation that will last? Is the recent abrupt rebound in beaten-down stocks and sectors the start of a longer-term recovery, or is this another head fake?
The above questions are now on the minds of many investors after many of the battered economically sensitive stocks, small-cap stocks, and reopening stocks have consistently outperformed the large-cap Technology-driven Nasdaq Composite and NDX 100 Index in the past two days. By some estimates, the Monday, 11/9/20 performances were one of the widest margins recorded in the past 36-years.
Although the catalyst for yesterday's surge in the reopening and value names is because of the vaccine news, many market pundits believe the shift toward a so-called value rotation is finally here. They contend the basis for the rotation toward value stocks is the expectation the economy is indeed recovering. It would appear the initial source of the money flow may have come from a reallocation of funds from cash and fixed income assets. However, to support a long-term investment shift, it would imply once cash and fixed income assets have been deployed, then new money must come at the expense of the pricey technology and stay at home names. We recommend investors pay close attention to the sustained divergence between these two investment styles. If this trend prevails, then this will imply investors believe the economic recovery is longer lasting.
Technically speaking, understanding the supply and demand equilibrium of growth stocks as represented by the S&P 500 Growth ETF (IVW) and value stocks as represented by the S&P 500 Value ETF (IVE) will help to uncover future trends. Only then will we have a clearer picture of the rotation between the growth and the value call. Enclosed below is a technical review of the two investment styles.
S&P 500 Value ETF (IVE – 122.55)
IVE has improved, as evidenced by the recent 11/9/20 surge above pivotal resistance at 118.12-118.40. The gap-up breakout suggests +14.14 points or an IVE target to 129.23 (2/12/20 high), and above this to 133 (ascending triangle breakout projection). However, the large-cap Value market has yet to clear above its all-time high of 129.23, confirming a significant V-pattern breakout. Since the height of the technical base is 49.31, a break out above 129.23 hints of an IVE target closer to 178.54, long-term. If this occurs, then this would support the technical basis for a sustained rotation toward value stocks from growth stocks.
S&P 500 Growth ETF (IVW – 59.44)
An overbought condition has developed after a sharp and explosive 78.81% Mar-Sep 2020 rally. The past 2-months action in IVW appears to be a high-level consolidation. It is necessary to alleviate an overbought condition that will allow for the resumption of the primary uptrend. The V-pattern breakout during early-Jul 2020 above 52.37 still suggests +17.44 points or a technical projection to 70. Also, note the 3-mo ascending triangle base is 7.75-points. A breakout above 62.46-62.54 also projects a technical target to 70. However, the recent failure to convincingly clear above 62.5 (Sep/Nov 2020 all-time highs) and a subsequent island reversal (11/10/20) hints of further consolidation is likely over the near-term. Initial support is 57.86-58.60 (11/4/20 gap up and 50-day ma). Violation suggests a deeper correction to 54.79-55.48 (9/21/20 and 10/30/20 lows), and below this to 51.75-52.37 (V-pattern breakout and the 200-day ma). A breach of the 200-day ma (51.75) would confirm an intermediate-term breakdown and warns of the start of an underperformance cycle.
On another note, it is important to closely track the composition of the two investment styles (growth versus value) as the largest market-cap-weighted names and the largest sectors can influence the overall trend of the two ETFs. As can be expected, S&P 500 Growth is dominated by Technology-based stocks as the top 10 market-cap-weighted names are predominately Technology-based names. Collectively the 10 IVW stocks account for 43.75% of the overall index. Technology and Communication sectors also contribute to 53.44% of the total index.
Although the S&P 500 Value ETF is weighted toward the top 10 stocks and the top 4 sectors, IVE is more evenly distributed than IVW. For instance, the top 10 market-cap-weighted names in IVE account for 20.77% of the overall index with balanced contributions from Financials, Healthcare, and Communication stocks. However, Healthcare, Financials, Industrials, and Consumer Staples sectors account for 60.52% of the overall IVE.
Another interesting point worth mentioning. The common denominator between IVW and IVE is the Healthcare sector. The Healthcare sector is the fourth largest sector in IVW, with a 10.10% market-cap weighting. Healthcare is the single largest sector in IVE, with a 20.21% weighting. An astute investor would have noticed this and may have taken advantage of this overlap by positioning more Healthcare names to hedge against the on-going debate between Growth versus Value style investing.
As of 10/9/20, the breakdown of the S&P 500 Growth ETF (IVW) is as follows:
The top 10 names within IVW by market-cap weightings accounts for 43.75% of the overall index. For instance, AAPL (10.47%), MSFT (9.26%), AMZN (7.5%), FB (3.75%), GOOGL (2.96%), GOOG (2.90%), V (2.01%), NVDA (1.88%), MA (1.70%), and CRM (1.32%).
IVW is also weighted heavily toward the top 4 sectors (Information Technology (40.36%), Consumer Discretionary (14.77), Communication (13.08%), and Health Care (10.10%).
As of 10/9/20, the breakdown of the S&P 500 Value ETF (IVE) is as follows:
The top 10 names of IVE by market-cap weightings accounts for only 20.77% of the overall index. BRKB (3.77%), UNH (2.85%), VZ (2.13%), JNJ (1.91%), PFE (1.87%), BAC (1.82%), T (1.73%), WMT (1.71%), JPM (1.59%), and CSCO (1.39%).
IVE is also weighted heavily toward the top 4 sectors (Healthcare (20.21%), Financials (19.25), Industrials (10.66%), and Consumer Staples (10.44%).