Rotation from Growth to Value – What the Heck Does this Mean?

Earlier this week we saw trading action that was somewhat odd and it could be rather significant if it continues to occur. There was some coverage from the financial media, but I saw very little on this subject in the mainstream media. The development I am talking about was a rotation from growth stocks to value stocks.

Granted, the rotation only occurred for a few days, at least so far, but it is something to pay attention to. It could mark a shift in risk tolerance from investors as value stocks are considered much safer than growth stocks. For the purposes of comparing the different universes, I put together the following chart with the SPDR S&P 500 Growth ETF (NYSE: SPYG) and the SPDR S&P 500 Value ETF (NYSE: SPYV).

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What we see is that on September 6 the SPYV moved up slightly as did the S&P 500 as a whole. The SPYG was flat on that day—closing at the same price that it did on September 5. On Monday, September 9, that value moved up 0.85% while growth moved down 0.71%. Again on September 10, we saw value move up 0.66% and growth fell 0.59%. On September 11, both value and growth moved higher, but value still outperformed with a gain of 0.86% compared to growth’s gain of 0.64%.

The differences may seem small, but as you can see on the chart, it is a very odd looking move.

While a few days might not seem like that big of a deal, we saw a similar move last fall. From September 28 through October 8, the SPYV moved up 0.87% while the SPYG fell 2.46%. That was a seven-trading day period and it came just ahead of the big declines in the overall market. From the close on October 9 through the close on October 29, the S&P 500 fell 8.2%, stabilized in November and then got crushed for the first three and a half weeks of December.

After the market bottomed in December, growth and value moved in lockstep with one another with growth outperforming the overall market and value lagging the overall market by a small margin. At least through September 5.

This is the type of performance distribution you expect to see in a strong bull market, but when it shifts to value leading, it can signal a shift in risk tolerance from investors and it can mark a top in the market.

Last week I wrote about how September is traditionally the worst month of the year for stocks, but we have also seen some major moves lower in October. One of the possible reasons for strong downward moves in October is because it is the start of third quarter earnings season. In the first weeks of the month, companies will start releasing results from the third quarter that just ended. If investors expect solid earnings and companies deliver disappointing results, it can drive the market down sharply.

If we look at the sentiment toward the overall market, we saw bearish sentiment grow in the first few weeks of August. The Investors Intelligence bull/bear ratio was above 3.0 for quite a while and then fell below that threshold and held in a range between 2.3 and 2.4. This week saw the ratio jump back up to 2.79, indicating that the bullish sentiment is growing once again.

The AAII Sentiment Survey showed a much bigger shift in bearish sentiment back in August, but it has also started shifting back to a more bullish posture.

I know I am probably starting to sound like a broken record with the cautious views, but I don’t want readers to get caught off guard by another market downturn.

About Rick Pendergraft

Rick has been studying, trading, analyzing and writing about the investment markets for over 30 years. He has worked for some of the largest financial publishers in the world and he has been quoted in the Wall Street Journal, USA Today, the New York Times and the Washington Post. In addition, he has been interviewed on Bloomberg, CNBC and Fox Business News. Rick’s analysis process includes fundamental, sentiment and technical analysis. Rick started college as an education major, wanting to teach economics, but eventually changed to majoring in Economics and received a Bachelor of Science in Economics from Wright State University. His desire to inform and educate people is at the heart of his writing.