Welcome to ADAPT Weekly – our weekly publication to investors seeking some of the most rewarding investment opportunities in the markets today.
Through relative strength analysis we uncover the strongest asset classes, sectors and industry groups that are in uptrends and showing the potential for continued profits.
As an investor, your success and profits are tied to your ability to adapt to what markets are giving – to the asset classes and sectors attracting institutional demand.
For the better part of the last 5 years, U.S. Large-Cap Growth stocks have been the dominant asset class, size and style.
Just take a look at this price chart of the S&P 500 index over the last 5 years.
The S&P 500 is a cap weighted index composed of 500 large-cap growth stocks.
Investors were wise to have leaned heavily on the secular leadership coming from large cap growth stocks – heck, I’d bet there are many new investors who know nothing else.
But, as the saying goes, the only constant is change. And successful investing requires a willingness to ADAPT.
For the first time in years, I can say, we’re seeing real evidence that the dominance of U.S. Large-cap growth stocks is being challenged.
Key data is suggesting that the relationship between growth and value is shifting in favor of value.
Let’s take a closer look..
The chart compares the relative strength between Growth and Value, using the iShares Russell 1000 Growth ETF (IWF) versus iShares Russell 1000 Value ETF (IWD) as our proxy.
So the ratio is comparing the strength of mid to large cap growth stocks vs their value stock counterparts. A rising line indicates growth stocks are outpacing value, while a falling line indicates value stocks outperforming growth on a relative basis.
What we can see is that the Russell 1000 Growth IWF vs Value IWD ratio just violated what we’ll call the line in the sand that growth needed to maintain to hold its leadership position.
It’s an important area, because this is where growth has previously been able to reassert its relative strength versus value – see arrows.
That line is right about 1.69. And as you can see (as of this writing, that line has been penetrated.
This looks like a logical place for a structural trend reversal to emerge favoring Value over Growth. It’s a place where Growth and Value investors have fought more than one battle over the previous year.
Now, can I say with absolute certainty that this is guaranteed to happen? That Value is going to win out. No, of course not. What I can say is the weight of the evidence suggests that value stocks are showing some serious strength as demand enters the value picture and that demand may push them over the top.
So, as long as the IWF/IWD ratio remains below this critical level (1.69), then investors can consider adding value stocks to their portfolios – at least, on a large-cap scale.
If the ratio reverses – and IWF moves back above the 1.69 threshold, then investors will have to stay alert to see if the demand momentum favoring value stocks can stick.
If you look at the sector breakdowns below you’ll notice the main sectors that drive the relationship between Growth/Value or IWF/IDW are Technology and Financials.
Right now Financials representing Value are breaking out while Tech, representing Growth is a little tired and looks to be on the ropes.
- Growth has a 55% allocation to Technology while only 2.5% of the fund is in Financials.
- Value is dominated by Financials, with a 25% weighting.
- Value has a significantly higher weighting in Energy and Materials than growth which has basically no exposure to these sectors.
For this reason, we like to watch the Technology vs Financials ratio for insight.
Here’s what it looks like right now using the Invesco equally weighted ETFs for Technology and Financials (RYT/RYF)
I think we’re at a key inflection point for this relationship for Tech vs Financials or Growth over Value or vice versa.
The only question is which way will it roll. Will it reverse and move in favor of tech stocks or will it falter, allowing value stocks like Financials to gain the upper hand.
We’ll continue watching these sectors (particularly Tech and Financials) as well as the internals underlying them closely for clues as to the future direction of the growth vs value trend.
For now, the data continues to build in favor of value while money flows out of tech and growth… and we’ve repositioned ourselves accordingly to take advantage of it.
Until next week, invest wisely…
If you find this article interesting or would like to learn more about how Rowe Wealth Management manages money click here to schedule a free consultation.
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