This has been a pretty simple one coming into 2016. Not all charts are as clean as this, so it’s hard for me to argue against selling Growth and buying Value. The longer-term trend has been to buy Growth stocks and sell Value stocks since 2006. This strategy has worked well, except maybe during 2012, but even that correction came within the context of a much larger bull market in Growth vs Value stocks.
Today we are looking at a ratio of the Russell 1000 Growth Index Fund vs the Russell 1000 Value Index Fund (IWF / IWD). This is a weekly line chart going back to the low in 2006 showing prices trending higher between 2 converging uptrend lines:
Coming into 2016, it was clear that we were running into the upper end of the range, and fading these highs was the right thing to do. So far this has worked well and I would continue to fade any strength. In other words, we want to be buying Value and selling Growth. Momentum putting in a bearish divergence at recent highs gives me even more conviction.
Let’s keep in mind what we’re talking about here. The Russell Growth Index is composed of Large-cap stocks representing the faster growth half of the Russell 1000 Index. It’s a cap-weighted index made up of names like Apple, Google, Microsoft, Facebook and Amazon, among many others. On the Value side, the index is made up of the cheaper, slower-growing half of the Russell 1000. This portfolio includes top holdings like like Exxon Mobil, General Electric, Johnson & Johnson, Wells Fargo and Procter & Gamble. I think it’s important to know what you’re buying and selling, in terms of components and groups of stocks.
Not only can we potentially make good money from trading this specific ratio, but it also adds information that we can use to help formulate a more macro thesis. I still like selling growth and buying value.
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Tags: $IWD $IWF $AAPL $FB $GOOG $MSFT $AMZN $XOM $GE $JNJ $WFC $PG