VALUE STOCKS CONTINUE TO LAG BEHIND GROWTH STOCKS -- FINANCIALS ARE HOLDING VALUE BACK -- RATIOS SHOW GROWTH STILL IN THE LEAD
S&P 500 GROWTH ISHARES HOLD 50-DAY LINE... A lot has been written about the relationship between growth and value shares. During last week's pullback in technology shares, cheaper value stocks held up better which raised questions about whether a rotation was starting from growth into value shares. So let's take a look at the two. Chart 1 shows the S&P 500 Growth iShares (IVW) bouncing this week after last week's successful test of its 50-day moving average. The big question now is whether last week marked a lowpoint, and how far the current rebound will carry. That depends mainly on technology shares. That's because technology accounts for 40% of the IVW. Consumer cyclicals (of which Amazon.com is the biggest stock) are second at 15%. While communications (which includes Internet stocks) are third at 12%. Which means that a bet on growth is mainly a bet on technology.
Chart 2 shows the S&P 500 Value iShares (IVE) bouncing off its 50- and 200- day moving averages. Last week's pullback was milder than in tech-dominated growth shares. The chart shows, however, that the IVE has been unable to clear its June high. That largely accounts for many of the negative divergences that have been showing up in various measures of market breadth. Needless to say, an upside breakout by the IVE would signal a resurgence in value shares and would help broaden out the market rally. So what's been holding it back?
A CLOSER LOOK AT VALUE GROUPS... Healthcare is the biggest part of the IVE with a weighting of 20%. And it's been lagging behind the market for the past few months. But Chart 3 shows the Health Care SPDR (XLV) trading above its June high. Two other big groups in the value ETF are staples (11%) and industrials (10%). Although staples haven't been market leaders, Chart 4 shows the Consumer Staples SPDR (XLP) also trading well above its June high. Chart 5 shows the Industrial SPDR (XLI) doing the same. The XLI (supported by stronger transportation stocks) has also been showing better relative strength of late. That has made industrials one of the stronger parts of the value universe. A stronger performance by healthcare would certainly help the value ETF. But the main drag on value appears to be weaker performance by financial stocks.
FINANCIALS ARE HOLDING VALUE BACK... Financials are the second biggest part of the S&P 500 Value iShares with a group weighting of 18% (just behind healthcare's 20%). Which makes the next chart all the more important. Chart 6 shows the Financial SPDR (XLF) trading below both its 200-day moving average (red arrow) and its June high. Its falling relative strength line in the upper box also shows it being one of the weakest parts of the market. In fact, the financial sector is the year's second weakest sector (-17%) second only to energy's loss of -42%. Bank stocks' loss of -34% so far this year is one of the main reasons for the weak XLF performance. And that may be tied to historically low bond yields which is a big negative for bank stocks. The bigger point in this message is that financial stocks (and banks in particular) are the main group holding the value ETF back. Which suggests that any serious rotation into value stocks is somewhat dependent on a stronger financial sector.
RATIO COMPARISON OF GROWTH VERSUS VALUE... Chart 7 plots a ratio of the S&P 500 Value ETF (IVE) divided the S&P 500 Growth ETF ((IVW) over the past five months. The chart shows the ratio rebounding last week due mainly to selling in technology shares. It also shows the ratio still below its 50-day average and a downtrend line drawn over its June/August highs keeping its downtrend intact. The ratio would have to rise above both resistance lines to signal a more serious shift in favor of value shares. Chart 8 turns that ratio upside down by showing a ratio of growth shares divided by value. That ratio is bouncing off its 50-day moving average (as are technology stocks). That's keeping growth stocks in the lead for as long as the 50-day average holds.
