Growth Versus Value – Has The Tide Turned?
Since the October 3 low, the S&P Growth Index (IGX) has gained 6.9%. Even more impressive, the S&P Value Index (IVX) is up 10%. This out-performance by the IVX has gotten the market’s attention.
The IVX is composed entirely of value stocks, and the IGX of growth stocks. Value stocks are stocks that exhibit a strong balance sheet and are considered to be undervalued based on the analysis of their fundamentals like book value, earnings and sales to price. Growth stocks typically exhibit the “strongest growth characteristics”. They are often part of new industries with an alluring narrative and a high potential for profit. However, these stocks are often more volatile than the overall market. Both value and growth components are drawn from the S&P 500.
The recent out-performance by the IVX has many investors wondering: is this a significant change in the strong growth over value trend that has been in effect since the last recession? Or, just a pause in the trend?
The most common method of determining the trend in $IGX versus $IVX is to run a ratio of the two. When the ratio is rising, growth is leading, and when it is falling, then value is leading. This monthly chart of the ratio (blue) goes back to November of 1999 and includes a 20-month Exponential Moving Average (EMA) of the ratio (red).
By August 2000, the growth-value ratio was dropping sharply. It was quickly below its EMA, which was also declining. This indicated a shift in favor of value. The ratio consolidated between January 2002 and March 2003 before it again turned lower. From March 2004 to the 2007 low, the growth-value ratio dropped from 1.165 to a low of 0.810.
It stayed below its EMA until September 2007, when it surged above its EMA just before the stock market topped out in October. These rallies were typical of the early stages the bottoming process. Finally, a month before the bear market bottom in March 2009, the ratio rebounded to 1.178. Since then, the monthly chart shows a clear uptrend during the bull market, with the growth-value ratio peaking out in August 2019 at 1.624. As of the middle of November 2019, the ratio has dropped to 1.492 which is just below the EMA. But of course, the month is not yet over.
The weekly chart of the growth-value ratio shows a number of changes in the trend throughout the bull market. The two longest occurred from late 2011 to 2013 (box d) and then from late 2015 to late 2016 (box e). The first formation dropped the ratio just over 18% in just under two years. The decline from the late 2015 high only lasted about a year, but was also a decline of just over 18%.
This chart also reveals that the long term levels of support and resistance are often quite helpful. For example, in early 2015, the high from 2011 at 1.232 (line c) was overcome. This then became an important level of support which was tested in late 2016.
In a similar fashion, the 2015 high was overcome in May 2017 which made the 1.342 level (line b) another level of support. After peaking at 1.563 in October 2018 the ratio pulled back to a low at 1.424 (line a). The ratio is currently at 1.510, so 1.424 is now the first important level to watch if the ratio continues to decline.
This weekly chart focuses on the correction from the September 2011 high to the July 2013 low (shown in the previous chart as “box d”). On the bottom of the chart, I have included the Moving Average Convergence-Divergence (MACD) and MACD-Histogram, which both turned negative in October 2011 (point a) after the ratio had peaked in September. The MACD’s turned back to positive in early April 2012 (point b), and this signal lasted until the middle of August (point c).
The ensuing decline lasted until April 2013 when the MACDs again turned positive (point d). The uptrend in the MACD’s confirmed the move in the ratio above its resistance at 1.146 (line e), which was consistent with an end to the correction. The downtrend, just above 1.200, was the near term target, and was overcome in 2014.
So what about the current technical outlook? At the end of July 2018, the MACD’s turned negative, but the ratio did not reach its high until the end of September 2018. The MACD’s stayed negative until the end of February 2019 (point d) and this positive signal stayed in effect until the start of July 2019 (point e).
The growth-value ratio continued to move higher until the middle of August, but the MACD’s stayed negative and have both subsequently plunged with no signs yet of a bottom. The 20-week EMA is declining steadily at 1.54, and is the first major barrier on the upside.
The growth-value ratio has recently bounced from the lows, and shows some signs of trying to stabilize. Before one concludes that a major top in the ratio has been completed, like in 2000, there should be a rally that fails back towards the 1.560-1.600 area. But, my analysis indicates the recent strength of value over growth just represents a pause in the major trend of growth over value, and not a significant turning point.
However, the gap between the MACD lines and the negativity of the MACD-His indicate that this pause is likely to stay at least through the end of the year. Until then, value stocks could very well outperform growth stocks. I recommend keeping an eye on this ratio, and looking for potential weekly buy signals for growth stocks in early 2020.
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