The recent selloff by some of the sexy growth names like TSLA, AAPL, the solar stocks (eg-TAN ETF) triggered a massive move in Value stocks relative to Growth.
The IVE (value ETF) and IVW (growth ETF) really started to diverge dramatically in the middle of February. While this discrepancy is becoming increasingly noted by investors (who ignored value in the past), positioning can still push the two further apart going forward.
Here is the value chart. Nice uptick in Feb & March:
Compare that to the growth chart. Big drawdown in Feb & March:
Investors focused on growth, clean energy, and “stay inside” names throughout the pandemic. Meanwhile, they ignored other areas of the market. Back while that was happening, I was pounding the table that this wouldn’t last. I felt that a rotation into value was inevitable – the sexy stocks were ridiculously overbought, overpriced and overhyped. And here we are today, witnessing that rotation. True, that mentality won’t completely reverse in just a month or two. However, things move much quicker these days. A transition from growth to value might have taken a year to play out when I was a relatively new Portfolio Manager in the 1990’s. Now, its all about momentum, and momentum changes direction hard, when it does change. Gains beget gains and losses beget losses in this new environment.
My opinion is that the value vs. growth rotation is just getting started. That rotation won’t be smooth and easy. The market is still programmed to buy growth dips – like Tuesdays big NASDAQ pop. Investors should expect violent swings as the transition into a value-dominant market develops. But make no mistake about it, I intend to remain focused on value, as I have been for 8 months, and I will not be sucked into the (likely) temporary moves on the growth stocks.
In other words: Although a Nasdaq bounce looks likely after the recent pullback, I continue to believe rallies should be sold!!
There is a clear loss of upwards momentum in technology – and resurgence into value.
Statistical evidence favors a continued rotation into value
Over a rolling 1-month period, SentimenTrader notes that the total return on value was more than 10% greater than the total return on growth. This was one of the largest spreads in 30 years. SentimenTrader notes that the last two times this happened, they marked the ends of long periods of Value stock under-performance.
More importantly: In the years following those thrusts, Value stocks crushed Growth stocks! In fact, when you get such a dramatic move as we’ve seen into value, it turns out that’s more the rule than the exception that value will continue to dominate the markets for substantial timeframes. SentimenTrader looked back too the early 1900’s and found this rule has been consistent (they note 8 such rotations). The chart below, courtesy of SentimenTrader, illustrates the spikes in value outperformance in 1992 and 2001 (bottom blue line) that lead the markets into sustained relative performance of valued vs growth (yellow arrows). It would appear that we are in the same position now.
Its not just the NASDAQ
Because of the S&P 500’s general bias toward Growth stocks, this means that it tended to perform pretty poorly after these signals according to SentimenTrader. . I have been harping on this strategy (SELL growth, avoid indexing, BUY value and reflation names) for at least 6 months now. Recent blogs have covered sectors like materials, oil, coal, airlines, tobacco, staples, utilities. Be selective in these sectors. There are reasons to be a stock picker rather than an ETF sector trader these days.
I have also been suggesting to diversify OUTSIDE of the USA, with a particular eye on commodity focused economies. Like Canada and the Emerging markets. My only caveat re the TSX (which we hold both commodity names and and index ETF) is that our current Canadian government wants to squash the very industry sectors (commodities) that will be in demand during this transition. This drives me to believe that a healthy allocation into EM, and Europe, aren’t such bad places to be.
As far as why I like Emerging Markets – Some of the EM countries like China and India use the stuff – so its inflationary to them. Be mindful of technology stocks (eg – the KWEB ETF) in China which do not react well to inflation:
Some of them (Chile, Brazil) make the stuff. Producing countries benefit from reflation in the USA. Disclosure: we own the Chile ETF, which you will note is breaking out–chart below:
Those of you who follow this blog, and who listened to me over the past 8 months when I recommended this shift are in the same position as ValueTrend: Outperforming – with less risk!
Going forward, I would continue to recommend this strategy over buying the tech stocks and the NASDAQ. “Buy the dips” is now “Don’t buy just because it dips”. Adding to the pressure: Biden is not a tech-friendly President as Trump – I have noted this in prior blogs. Just announced: Longtime tech critic Tim Wu is joining the Biden administration as an adviser on technology and competition, a signal that the White House is likely to push for policies that rein in Big Tech.
There are too many forces working against growth & technology stocks, and too many seismic changes that will drive money into value and reflation names to take a passive approach. Note SentimenTrader’s findings of lagging performance of the SPX as this shift occurs. If you are not already doing so, may I strongly recommend that you adapt a sector-rotational strategy. Or hire someone like ValueTrend to do it for you. Buying and holding index ETF’s is going to be a challenge during this shift into value & reflation names. The cap weighting in the big index ETF’s favors growth. In my opinion, that’s the wrong move.
Hi Keith, what are your thoughts on investing in Australia?
Very good technical profile–like TSX, just broke out (EWA)
really enjoy your technical analysis. if just starting out in technical analysis what would be the basic lessons you would give on when looking at a stock chart for a buy/sell that have worked for you over and over again through the years?
Big question Hans–I would like to suggest you read my book Sideways. I wrote it for “normal” / retail investors like you to understand how to structure a step-by-step investment process using technical analysis.
Thanks for all you do! Given the runups in financials, oil, and travel, at this point do you think the beaten down REITs are still providing good value (i.e. Riocan REI.UN)? It should do well on a fundamental basis with the reopening economy but it faces headwinds with e-commerce secular shift and increasing borrowing costs as interest rates begin to move higher.
Would it be more prudent at this point to wait for a short term pullback on the value stocks first before initiating a position?
We are largely avoiding real estate – particularly commercial (we have a small position in our aggressive strategy in a residential)–while re-opening will help many industries revive like travel and industrials, it will not likely bring commercial /office real estate back–the move has been made to more workers staying remote–virus or not. It saves time, money, aggravation for all involved for companies who don’t need in-face customer care
Not really on topic but if time permits:
I picked up ATD.B after a 20% drop or so.
I anticipated upside resistance at around $45.
20% upside or so from my purchase price.
It’s starting to make a move. Would you agree with that $45 resistance?
I tend not to comment on individual stocks Lance–lest I get caught into becoming everyones free Investment Advisor
Watch where everyone’s moving, and then go where they aren’t.
contrarian investing 101
As you mentioned, oil producers have already had a great uptick from their lows last March.
When will you take oil producer profits? Will you sell at the end of the seasonality for oil this year? Thoughts?
Wendy–the big picture is for reflation- oil is a key component to take advantage of that. But, as you note, seasonals are usually done by May. I will assess and determine if I take some – not all–off the table then. meanwhile I do expect and overbought pullback in materials in general. See my last video on that
Thank Keith, I watched the video.👍 Coal is a little too risky for me, but I do own some oil stocks.
At one point, I think that you commented that the TSX was overbought, and although the Tech sector on the Nasdaq in particular, sold off, the TSX in general didn’t seem to correct. Do you still think that it will based on the charts that you follow? Or do you see it just onward and upward from here? I did note that you think that we are overbought in materials and energy. I was wondering about the TSX in general. Thanks
My comment was that the TSX, at 10% over the 200 day SMA, is just at the overbought point but not as much so as the SPX and the NAZ. As such, it had less potential to correct, and if it does, it will correct less than the other two indices. But you are correct re the commodities–they are overbought. There will be some sort of correction. My opinion is that any correction on oil, metals etc will be pretty contained (5%?)- and dips should be bought. See my reply to Lee.
I was hoping you could provide your price targets for XEG.TO short and longer term including possible pullback zone. Unless I am mistaken we are in a wave 3 up with a wave 4 down to come, followed by one more wave up (wave 5). I do not know if you use elliott waves much but regardless, using your TA expertise perhaps you can provide a possible pullback zone for XEG.TO for those looking to buy more, as well as short and longer (ultimate) price targets to watch for.
I am not sure I want to be chasing here as perhaps we are extended, but I have no idea how high XEG.TO goes before a decent pullback.
Thanks for your thoughts,
True enough Lee, the materials and energy sectors are overbought and look like they will correct. I dont mind commenting on xeg because its a sector etf (I dont comment on individual names). To me, the pullback on XEG, if (when) it happens may inspire a retreat to $7 (from 8 now). But my conviction is that energy will rise over the coming year, and we are looking at $12 perhaps on XEG. So- my view is to possibly sell some exposure (I hold stocks, not an ETF) in the spring at seasonal sell time for the sector, but a pullback in the summer or late spring would inspire re-entry for mid-termed upside.
I was looking at EM, specifically India ZID,XID and China ZCH XCH. However, 1. They do not seem liquid – Small volume – Gaps between trades. 2. The actual Indian and Chinese markets are closed when the etfs are being traded here, so it seems the etf pricing and trading is sentiment based and detached from the composite pricing of the underlying stocks.
How are you able to make it work for you when you are trading large volumes?
Paul–volume does not matter to us when it comes to ETF’s. We go right to the market maker with big orders ensuring we don’t get pooched like if you were buying a thinly traded stock. Next, you are correct re the time differences and the problems that presents. But, we are taking a multi-month approach. Again, the market maker protects him/herself when you buy a large chunk, but he/she still tries to give you as close as possible to a fair price. Again, whether that works out as a fractional percent off or so, we are looking to a longer trade that makes this inefficiency less concerning
Good Morning, Keith: want to know if you think Gold and Silver has bottomed and if so, is it time to buy GDXJ (gold junior minors) & SILJ (Silver minors)? I like you commodities trade, what do you think of a broad based commodity ETF: DBC.
Thanks and Happy Fridays
Gold has support at 1680, and we will need to see it hold there before drawing conclusions of a bottom. Sentiment is very depressed on gold, so it is likely it is nearing a bottom, but i wont call that until it proves
70% of the holdings in IVW are in IVE. Since March 15, 2010, the linear correlation of both ETFs is 93%. These ETFs are basically the same. This “value” rally has been due to financials and energy. It’s not surprising that IVE’s top five holdings are BRK, JPM, DIS, BAC, XOM, three of the five are financials. Growth and value are not mutually exclusive. But right now, the Wall St. narrative is rising interest rates and value over growth. Wall St. and financial pundits love their narratives. Beware of “financial experts” broad brush-stroking growth as all of it underperforming in the future. Plenty of growth is also value and will do quite well.
True enough David. Its difficult to demonstrate the concept of this shift with an ETF given those crossovers. But, as stock pickers (I try to encourage readers to be stock pickers and not ETF players), we can most certainly see value stocks outperforming. Being a TA – I look for base breakouts as a way of looking at potential value plays (I then have Craig do his fundamental magic to determine if there is indeed “value” there”) – as such, a value stock to me looks like most of the energy names, travel names (airlines), communication stocks, and even some of the staples.
This looks to be a perfect storm for higher oil prices surging demand in China and the North America as to they recover from covid and then production difficulties in Texas from the freeze
So many reasons we bought oil, Dave. True, all of the materials are pretty overbought and could stage a 5% pullback or so, but the bigger picture is for these sectors to keep moving up after any such correction
Love your blog and your books.
Do you have any comments about the divergence in some major indices (S&P 500 & TSX) against their RSIs and MACDs.
Very minor movement by these indicators Sergio–I am not yet ready to suggest they are significant divergences—but to you point, bear watching
Everything seems so rosy in the way and the stock market is so high so could there conceivably be a correction soon. Most indexes can’t just keep going up and up. What about another Black Swan. I’m just thinking of maybe it’s good time to sell a couple of things. It’s just too rosy
Absolutely room for a short termed correction, Linsay. But…when?