Is Value Back in Vogue?

Value stocks have had a rough go of it in recent years, especially when compared to their growth factor counterparts. Held back by weakness in Financials, Healthcare and Energy which together comprise 40% of the S&P 500 Value Index ($IVE) - the group has underperformed the S&P 500 Growth Index ($IVW) by roughly 100% over the past decade.

This outperformance from growth stocks has been a well-known trend as IVW has almost doubled the return of IVE over the trailing 5-year period and is also outperforming over the trailing 12-months as well as on a YTD and 6-month basis. Not only is value underperforming growth across all these timeframes but it is also lagging the broader S&P 500 Index ($SPY). For example, growth is up 20% and the S&P is up ~18% in 2019 while value has lagged both, returning only 16.5%.

While it's been an unprecedented run for growth stocks, recent sector rotation and price action in favor of value stocks is indicating that this decade-long theme may have run its course. For the first time in years, we are starting to see more cyclical and value-oriented sectors such as Materials and Financials assume leadership positions on short-term timeframes.

For example, Materials are up over 9% over the trailing month vs just a 4% return for the S&P 500. Energy and Industrials are also outperforming the S&P 500 during this period. And on a trailing 3-month basis, Financials ($XLF +9%) have been the top performing sector among large-cap SPDR ETFs (followed by Materials, $XLB +8%), as they have almost doubled the performance of the S&P 500 which is up only 5%.

While this sector rotation towards value takes place beneath the surface, the ratio chart of the S&P 500 Growth Index relative to Value (IVW vs IVE) is teetering just above its prior all-time highs from 2000 with a bearish momentum divergence that dates back over 2-years. This is a 20-year weekly chart of the ratio.

As price has continued to grind to higher highs since May of 2017, momentum has been establishing lower highs and barely managed to reach overbought conditions when price made its most recent record high in May. The ratio is dangerously close to rolling over below its prior all-time highs from 2000 and 2018 at 1.53. If we breach these highs, it would confirm the bearish momentum divergence as well as register a failed breakout. From failed moves come fast moves and the more significant the failed breakout is, the more powerful the reactive move lower will be. In the case of growth vs value, prices are potentially failing just after registering fresh 20-year highs. Look out below.

Hope you enjoyed this post! As always, please feel free to reach out to me directly at Strazza@TheChartReport.com with any questions or comments.