The key challenge for every investor is to be invested in market segments that are trending. Right now, value stocks as a market segment is trending higher, while growth stocks are seemingly stagnating. The ratio of the two confirms the ongoing market sector rotation into value stocks.
Investors should analyze markets in a top-down fashion. On the highest level, they should compare how leading assets are performing, and how they are trending. With leading assets we refer to stocks, bonds, commodities, gold, currencies. Next, within stocks, it is key to distinguish segments like growth and value, as well as specific sectors. Only after analyzing those two levels, investors can look into specific companies as part of the stock picking process.
That said, as our expectation is that stock markets in 2017 will remain bullish, the key question is which sectors are most interesting. As the highest level segment split within the stock market, we look at value stocks vs growth stocks.
Value stocks, being one of the two highest level market segments, represents a market segment which includes primarily three market sectors:
- financial stocks (represented by XLF ETF)
- energy stocks (represented by XLE ETF)
- industrial stocks (represented by XLI ETF).
Value stocks as a segment is represented by the ETF called IVE, and it is shown on the first chart. The pattnern on IVE’s chart reveals strength: after a long consolidation, IVE is now trending higher. Note how former resistance became support, and it was confirmed in October of this year.
On the other hand, growth stocks, represented by the IVW ETF (chart below), seem to be stagnating at this point. It is not clear whether they will trend higher in a similar fashion as IVE does currently. One thing is clear though: in the coming months, growth stocks will arrive at a pivot point, as two trendlines will cross each other. From a chart analysis perspective, this will be a major event, with significant consequences for investors.
Market sector rotation visible in this ratio chart
The ratio value stocks vs growth stocks shows very clearly how value is outperforming growth. The ratio has broken out in favor of value, as shown on the last chart. This suggests that value stocks, in particular found in the financial / energy / industrial sectors, will be good investments going forward.