Value may be your best investment choice in 2021

October 26, 20202 Comments

Growth stocks have been the place to be since the COVID crash. The iShares Morningstar Growth Index ETF is very similar in appearance to the supposedly broader diversified S&P 500 index. Note the surge in the angle of ascent on the value stock index since March (chart below). Last week I blogged on some divergences on the NASDAQ chart between momentum and price action. The exact same pattern can be seen on both the broader SPX chart and the iShares Growth Index chart below. Note the negative divergence by stochastics, RSI, and now, MACD against a flat (potentially a double top?) Growth Index chart formation. Note the falling moneyflow momentum in the top pane. Moreover, there has been negative smart/dumb money flow in the larger SPX index lately, much of which has been driven by the growth sector. See this blog for more details on that observation.

While the trend in growth stocks is undeniable, there is little doubt that the setup at this time is for some sort of corrective action. Thus, I view the growth sector (including NASDAQ/SPX) as a neartermed sell or at best, hold.

What about value stocks?

Now lets apply the same indicators to the iShares Morningstar Value ETF. The chart below illustrates a moderately bullish looking stochastics move, and a flat RSI. These indicators suggest that there is little neartermed upside for this ETF. However, they are NOT diverging negatively like the growth stocks.  This means they are NOT signaling a strong pullback in the manner that the growth index is potentially setting up for. In other words, in a market correction, it is likely they will be hit to a lesser degree. The MACD indicator appears quite bullish, having trended up against a moderately rising chart, and having just crossed its zero line. This suggests that the mid-termed view (greater than one month) that could be bullish for value stocks. Moneyflow momentum, top pane, is oversold – the opposite of the growth index chart’s overbought and declining indicator. That’s another positive.

 

Conclusion

We moved closer to 30% in cash just a week or so ago within the ValueTrend Equity Platform. We anticipate negative price action coming into the US election. Growth stocks will be more vulnerable than value stocks in our opinion. Post election volatility is dependent on how close the election results are. First years within the presidential cycle are largely bullish, no matter who gets elected. The next few weeks will present opportunities for buying stocks at lower prices than they have been for a while. Buying into this volatility will allow investors to find good entry prices on positions that will enable participation in a market rally in 2021.

2 Comments

  • Hi Keith,

    Do you think 7% to 10% down for SP500 is a good entry level to start to buy the index.

    Thank you.

    Sam

    Reply
    • Rather than use a % decline, I’m inclined to look at support levels, Sam. One is being tested right now–the 50 day SMA which sits just a hair over 3400.
      The next is in the 3250-3300 area
      The final support which is very unlikely to be penetrated is the 200 day SMA near 3130.
      My view is to wait until the election is done. One of those will hold at some point, and that is the area to buy on a bounce from.

      Reply

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