Value-Growth Rotation for the Long Term
Updated
Back in September I posted about the rotation from value to growth, and I laid out three targets for the ratio of RSP (an equal-weighted S&P 500 ETF) to SPY (a cap-weighted S&P 500 ETF).
I updated the idea in November to note that the trade was playing out as planned and had hit my second target.
In January, we finally hit my Target #3, bringing the original trade idea to its fulfillment.
The market has pulled back a bit from Target 3, but it now looks to have established some support at the 20-week and 50-week moving averages after a bullish moving average cross. It's great that the original trade idea played out so beautifully, but ultimately this is a long-term trade for me rather than a short-term swing. Equal weight has underperformed cap weight for five our six years, but I believe the cycle has hit its bottom and it's time for equal weight to shine.
There are several reasons to think it might be value's time to shine. Firstly there's the matter of valuations. Judging from price ratios, large-cap tech is more expensive than it's ever been. A lot of these big tech firms still have 40-50% downside to their median valuations of the past 4 years. The big 5 stocks are about 25% of total S&P 500 market cap. Meanwhile, value is relatively the cheapest its ever been. There are lots of great charts about this in a post on the AQR blog titled "Is Systematic Value Investing Dead?" The author slices and dices the data all sorts of ways, but finds that pretty much no matter what ratio you use or how you test for robustness, the value discount is several standard deviations cheaper than normal right now.
aqr.com/Insights/Perspectives/Is-Systematic-Value-Investing-Dead
In previous posts, I've laid out several other reasons to be bullish on value. For one, large-cap tech companies are being targeted by antitrust suits in Europe and the US. With Democrats having unified control of the US government, it's also likely that antitrust action will be on the legislative agenda. Furthermore, inflation and a weakened dollar have caused food and commodities prices to soar, and a lot of "value" companies have large commodities exposure. Assuming that the US dollar remains weak compared to other currencies, value should continue to outperform.
I updated the idea in November to note that the trade was playing out as planned and had hit my second target.
In January, we finally hit my Target #3, bringing the original trade idea to its fulfillment.
The market has pulled back a bit from Target 3, but it now looks to have established some support at the 20-week and 50-week moving averages after a bullish moving average cross. It's great that the original trade idea played out so beautifully, but ultimately this is a long-term trade for me rather than a short-term swing. Equal weight has underperformed cap weight for five our six years, but I believe the cycle has hit its bottom and it's time for equal weight to shine.
There are several reasons to think it might be value's time to shine. Firstly there's the matter of valuations. Judging from price ratios, large-cap tech is more expensive than it's ever been. A lot of these big tech firms still have 40-50% downside to their median valuations of the past 4 years. The big 5 stocks are about 25% of total S&P 500 market cap. Meanwhile, value is relatively the cheapest its ever been. There are lots of great charts about this in a post on the AQR blog titled "Is Systematic Value Investing Dead?" The author slices and dices the data all sorts of ways, but finds that pretty much no matter what ratio you use or how you test for robustness, the value discount is several standard deviations cheaper than normal right now.
aqr.com/Insights/Perspectives/Is-Systematic-Value-Investing-Dead
In previous posts, I've laid out several other reasons to be bullish on value. For one, large-cap tech companies are being targeted by antitrust suits in Europe and the US. With Democrats having unified control of the US government, it's also likely that antitrust action will be on the legislative agenda. Furthermore, inflation and a weakened dollar have caused food and commodities prices to soar, and a lot of "value" companies have large commodities exposure. Assuming that the US dollar remains weak compared to other currencies, value should continue to outperform.
Note
I just noticed that the US dollar broke upward out of its falling wedge yesterday. Likely bearish for commodities, value stocks, and foreign equities, at least short term. Note
Conviction seems to be growing for the rotation out of growth and into value. RSP vs. SPY is above my original Target 3 and making new highs.Note
Impressive rotation to equal weight has continued. Assuming we eventually revisit the 2016 high, we're a little over halfway there.Note
Small caps have been pulling back sharply after a long period of out performance. I think we're probably approaching a support area:Note
Small cap pullback is at the support I previously indicated. It also has the 50 EMA here. There are some secondary supports not too far down.Note
Watching this very closely to see if 20-day EMA holds tomorrow, or if it will break down and make a double top.If it does break down, next possible bounce level is the 200-week EMA.
Note
Small cap outperformance appears to be over. RSP/SPY just officially completed a triple top. Traditional technical analysis would call for a move to the lower blue support on a triple top, but I think there's still chance for a bounce from the green line at the 200-day EMA.
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