[Unlocked] A Valuable Exercise

Before we get into the charts, it's important to set the stage for our discussion by looking at what sectors make up the Value and Growth Factors. By understanding the drivers of this secular uptrend in Growth and downtrend in Value, we can better assess whether they're likely to turn.

Below is a screenshot from Koyfin showing the sector weights of the S&P 500 Growth ETF (IVW) and the S&P 500 Value ETF (IVE).

Click on table to enlarge view.

Here's a table I created in excel to see what the differences in weightings are for each sector.

What we can glean from this data is that Growth is more heavily skewed towards IT, Communications Services (basically more IT), Healthcare, and Consumer Discretionary.

Value, on the other hand, is massively overweight Financials and has just about double the weighting of Energy, Utilities, and Consumer Staples.

Without getting too caught up in the minutiae of it all, the message is clear. For Value to outperform, Financials need to be doing a lot of the heavy lifting. For Growth to outperform (as it has), Tech needs to be doing a lot of the heavy lifting.

Sure the other sectors are important and the differences in weighting do make a difference, but those two areas of the market are generally the driving force behind the long-term trends in these factors.

Here's a chart of the S&P 500 Growth/Value ratio sitting just above its 2000 and 2018 highs as momentum diverges. The big question here is, will this turn out to be an "oops" and an epic reversal of this 12+ year structural trend? or is this simply a consolidation before the trend resumes higher?

Click on chart to enlarge view.

I don't know...and I don't see enough evidence to suggest making an aggressive bet in either direction just yet.

If Technology were to roll over, this 423.6% extension of the 2007-2009 decline would be a logical area. Even so, there is a lot of potential support back at its 2000 highs. A 20% decline is nothing to scoff at but is it enough to flip this growth/value trend on its head? Potentially...but not likely without this second piece of the puzzle.

Remember that Value has a 15.36% higher weighting in Financials than in Growth and they are still stuck below their 2007 highs. Until they experience a structural breakout and trend acceleration as we saw in Technology, it's not unlikely that Value can begin a sustainable trend of outperformance relative to Growth. It's just math.

Here's a ratio of the two, coiling tightly below long-term support as momentum diverges. If prices can break back above these lows then we can see a sharp move to the upside, but even then there will be a lot of work left to do before its structural downtrend is reversed.

Additionally, Energy has started to stabilize which would be another step in the right direction.

We've talked about Oil Services breaking to new lows, momentum diverging, and then prices quickly reversing. Again, is this a quick mean-reversion trade or the start of something much bigger? It's too early to tell, but the reward/risk is very much in favor of the bulls at current levels.

The Consumer Staples sector has more or less done nothing for 3 years and with each new high momentum fails to reach overbought territory. Again, if Value is going to pick up we need to see Staples break out to new highs and confirm a new cyclical uptrend has begun.

We're just not seeing that yet.

Utilities have been able to break out of their base to new highs, but again momentum is not confirming this move and creates the potential for a reversal to the downside. Even if it is successful, the difference in weightings is roughly 3%, which really isn't going to move the needle.

There are times when picking a tactical bottom for a trading opportunity makes sense in the Value Factor (and most other things). Below is a great example of that where we've been discussing with our Institutional Clients the potential for a mean-reversion move higher in some Value Factor ETFs relative to the broader market.

We're also seeing the same action Internationally.

Whether you're buying this for a bounce, waiting to sell strength, or both, there's undoubtedly an opportunity for those that take a more tactical approach towards their portfolio. But if you're a longer-term market participant, you're not concerned with these shorter-term moves. You care about the trend that fits your timeframe. The rest is noise.

Again, I'm not against looking for counter-trend opportunities in these factors. Far from it.

What I am against is using every uptick in the Value Factor to call a long-term bottom in a structural trend that is undeniably lower. As Technicians we are looking to capture the "meat" of a trend, which does not require having to catch exact tops or bottoms in order to make money.

If this truly is "THE BOTTOM" in the Value Factor relative to Growth, the broader market, and whatever else you want to use as the denominator, we will have plenty of time to enter and participate in this new trend.

For now, I remain focused on the tactical trading opportunities that present themselves while monitoring the structural changes I think will ultimately drive the improvement of the Value Factor over the long-term.

Thanks for reading and please let us know if you have any questions!

Allstarcharts Team