VALUE STOCKS GAIN ON GROWTH -- VALUE GROUPS INCLUDE FINANCIALS, ENERGY, AND HEALTHCARE -- STAPLES AND UTILITIES TURN DOWN ON BOUNCING BOND YIELDS -- RISING COMMODITIES HURT BOND PRICES -- VERIZON LEADS TELECOM LOWER AS DIVIDEND-PAYING STOCKS WEAKEN
S&P 500 GROWTH ISHARES ARE STARTING TO LAG... For the first time since the latest bull market began in 2009, value stocks are gaining ground on growth stocks. The bull market is in its seventh year and looking very mature. One way some investors are participating in the current uptrend without taking too many chances is by moving money out of growth stocks that depend on growing earnings (in a slow earnings environment) and into value stocks that are considered to be undervalued. Chart 1 shows the S&P 500 Growth iShares (IVW) up against their fourth quarter highs. The IVW/S&P 500 ratio (top of chart), however, shows that the IVW has been lagging behind since January. Technology is the biggest part of the IVW. Technology stocks have been one of April's weakest sectors. The tech-dominated Nasdaq market has also underperformed since the start of the year. Apple (AAPL) is the biggest holding in the IVW and is down 10% since November. Other large holdings are Microsoft (MSFT), Facebook (FB), Amazon (AMZN), and Google (GOOGL).
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Chart 1
S&P 500 VALUE ISHARES ARE DOING BETTER... Chart 2 shows the S&P 500 Value iShares (IVE) having broken through its fourth quarter high and nearing the highs reached last spring. The bigger story is the upturn in the IVE/SPX ratio (top of chart) starting in January. That shows new leadership in undervalued stocks. [The 50-day average has also risen above its 200-day line for the first time since August]. It's not hard to understand why considering that its biggest sector holdings are financials, energy, and healthcare. All three sectors have started to show relative strength after a long period of underperformance. They're also among the most undervalued sectors in the stock market. Among its biggest stock holdings are Exxon Mobil (XOM), JP Morgan (JPM), Wells Fargo (WFC), Chevron (CVX), Johnson & Johnson (JNJ), Merck (MRK), Citigroup (C), General Electric (GE), Pfizer (PFE), and Schlumberger (SLB). That's an impressive list of recent market leaders.
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Chart 2
VALUE GAINS ON GROWTH ... Chart 3 is a "ratio" of the S&P 500 Value iShares (IVE) divided by the S&P Growth iShares (IVW) over the last two years. The value/growth ratio bottomed in January and broke a falling two-year resistance line. That's the biggest gain in value in two years. Its longer range chart suggests that the pendulum may be swinging back to value stocks.
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Chart 3
VALUE IS OVERSOLD VERSUS GROWTH ... Chart 4 is a ratio of the S&P 500 Value Index ($SVX) divided by the S&P 500 Growth Index ($SGX). [I switched to their cash versions to get a longer-range perspective]. The green line is the 14-month RSI. The chart shows two previous turning points in 2000 and 2007. The value/growth ratio bottomed in 2000. Notice that the 14-month RSI formed a "positive divergence" of rising bottoms between 1998 and 2000 which signalled a major bottom in the ratio from oversold territory below 30. That signalled a shift toward value. Between 2006 and 2007, the monthly RSI line formed a "negative divergence" of falling peaks from overbought territory over 70. That signalled a shift to growth. To the bottom right, the 14-month RSI is rebounding from oversold territory for the first time since 2009. That suggests that the pendulum may be swinging back to value for the first time in nine years. Which is just another way of saying that investors may be starting to move into undervalued parts of an aging stock market.
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Chart 4
STAPLES AND UTILITIES TURN DOWN ... Chart 5 shows the Consumer Staples SPDR (XLP) threatening to fall below its 50-day average for the first time since February. Its relative strength line actually peaked in February. Chart 6 shows the Utilities SPDR (XLU) already below its 50-day line. Its relative strength line is falling as well. A lot of people have wondered why those two defensive groups held up so well during the last two months as the market rallied. In fact, their relative strength lines started slipping in February when the market bottomed (two top lines). Low bond yields also supported both dividend-paying groups. The green bars in Chart 6, however, show the Treasury 10-Year yield starting to rebound. That's hurting bond proxies like utilities.
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Chart 5
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Chart 6
HEALTHCARE SPDR TURNS UP... Healthcare qualifies as one of the market's most undervalued groups that's starting to attract new money. Chart 7 shows the Health Care SPDR (XLV) climbing above its 200-day average and a resistance line drawn over its August/December highs. The XLV/SPX ratio (top of chart) has started rising as well. Energy is another one.
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Chart 7
EXXON MOBIL TURNS UP ... I mentioned in paragraph two that energy was the second biggest sector in the S&P 500 Value iShares (IEV), and that Exxon Mobil (XOM) was the biggest stock holding. Chart 8 shows Exxon having climbed above its November high to initiate a new uptrend. Its 50-day has also crossed over its 200-day average forming a bullish "golden cross". New buying in the energy patch is based on the price of crude oil rallying to a new five-month high. I suspect this year's rally in oil and other commodities is one of the reasons that bond yields are bouncing.
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Chart 8
RISING COMMODITIES HURT BONDS ... The brown bars in Chart 9 show the Reuters/Jefferies CRB Index (plotted through yesterday) bottoming in February and climbing to the highet level in four months. The CRB includes 19 actively traded commodities, most of which have been rising. Energy and metals have been two of the strongest groups. Historically, rising commodity prices have been bad for bond prices. That's because rising commodities imply higher inflation in the pipeline which usually pulls bond yields higher and bond prices lower. Chart 9 shows the upturns in the CRB Index during February and April coinciding with weaker Treasury bond prices (green bars). That also explains why money has started flowing into inflation sensitive stocks like energy and metals, and out of interest-sensitive stocks like staples and utilities. And telecom.
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Chart 9
VERIZON LEADS TELECOM LOWER... Dividend-paying telecoms are also falling today. Chart 10 shows Verizon Communications (VZ) tumbling below it 50-day average. The company warned that problems with its labor union may hurt second quarter earnings. At least that's the headline reason. I suspect it may have more to do with the jump in bond yields. The Verizon/SPX ratio (top of chart) also peaked in February when bond yields bottomed. Telecom stocks are one of the day's weakest groups along with staples, utilities, and REITs. And they're all falling for the same reason. Rising bond yields diminish the appeal of dividend-paying stocks.
