RETURNING TO VALUE -- FIVE YEAR RUN OF VALUE DOMINANCE CONTINUES

VALUE IS STILL IN THE LEAD ... One of the battles going on in the market is the one between large cap value versus growth. Charts 1 and 2 show a six-month comparison of two ETFs that reflect those two market segments. Chart 1 shows the S&P 500 Value iShares (IVE) testing their early March peak at 63.5. Chart 2 shows the S&P 500 Growth iShares (IVW) trading well below their March high. That simple comparison gives a hint that the large cap value ETF has been stronger than the growth. How much stronger can be seen more clearly in Chart 3 which is a ratio of Chart 1 divided by Chart 2. That ratio had been dropping since the end of 2004 which reflected a shift out of value and into growth. Since mid-May, however, the pendulum has swung pretty decisively back to value as the value/growth ratio has risen to a new high. Large cap value has been leading growth since year 2000. That's a long run. Earlier this year it looked like the five-year dominance by large cap value might be ending. Recent action shows that investors still favor value over growth.

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WHAT'S DRIVING VALUE ... Most of the recent surge in value has taken place since the start of June. It's not hard to see what's driving the value surge. The top four sectors during June have been energy, utilities, financials, and consumer discretionary stocks (mainly homebuilders and retailers). Those are the sectors most heavily represented in the large cap value ETF. The weakest sectors since the start of June have been consumer staples, industrials, and technology. They're most heavily represented in the growth ETF. Two of the biggest contributors to the June rally in value are Exxon Mobil and Bank of America. They reflect the rise in oil prices and falling interest rates. Two of the biggest drags on the growth ETF are General Electric (Chart 6) and Microsoft (Chart 7).

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