Did Value Stocks Rise Too Far, Too Fast?

It was a good holiday-shortened week for the stock market as it recovered quickly from the prior week’s late selling. Once again, it was encouraging news on a vaccine that helped boost stocks. At approximately 5:00 AM Monday AstraZeneca (AZNCF) announced that its new COVID-19 vaccine has demonstrated an average efficacy of 70% in experimental trials.

For the third Monday in a row, there was vaccine news that pushed the major averages higher on Monday’s open. Last Monday’s S&P 500 open was only 0.25% higher while the prior Monday the S&P 500 gained 0.42%. Of course, the Pfizer news on November 9 triggered a 2.1% higher open in the S&P 500.

For the week, the S&P 500 gained 2.3%, as it again lagged the 3.9% gain in in the iShares Russell 2000 and the 3% gain in the Nasdaq 100 Index (NDX). Year-to-date (YTD) the NDX is up 40.4%, which, even if it is unchanged in December, would make 2020 the best yearly performance in the past decade.

The Dow Jones Transportation Average added another 2.7% last week and is now up 15.2% YTD, as it has outperformed the 12.6% YTD performance in the S&P 500. It was a rough week for the SPDR Gold Shares, and the sharply lower monthly close I discussed earlier in the month likely means a further decline in the months ahead.

Last weekend, the technical action in the stock market, high bullish sentiment, and the likely rebalancing of portfolios at the end of the month favored a correction. There were some signs of rebalancing late last Friday, November 20, as two large orders totaling 1.5 billion shares traded in the iShares 7-10 Year Treasury Bond ETF (IEF). For that week, $2.2 billion was pulled from the ETF, “the most since 2014”.

It was another week that value stocks outperformed growth, as the S&P Growth Index Cash ($IGX) was up 1.94% while the S&P Value Index Cash ($IVX) was up 2.78%. In October, I examined the long-term ratio chart of $IGX to $IVX. So far this month, the ratio is down 3.65%, as it closed Friday at 2.000, down from the July high of 2.143.

Even though the decline in the ratio has been significant, it does not confirm that a major top has been formed such as what occurred in 2000 (point 1). As the chart indicates, from late 2000 until late 2007 value stocks outperformed growth stocks. Since then, growth has been the clear leader, especially in 2020 when the ratio has accelerated to the upside. The monthly Moving Average Convergence-Divergence (MACD) Histogram has declined, but is still well above the zero line.

The top in 2000 took some time to form, however. As the weekly chart of the $IGX:IVX ratio shows, it made a high in March 2000 of 1.5602, and then declined for 10 weeks before bottoming in May 2000 as support (line b) was reached. From this low, the ratio rebounded for six weeks and slightly exceeded the prior high (line a).

The decline from the high violated the important support (line b) in September and completed the double top formation. As the long term chart indicates, the ratio tried to stabilize in 2002-2003 as the overall stock market bottomed. As the new bull market began in 2003, value continued to lead growth.

So far in November, $IGX is up 9.6% while the $IVX is up 13.8%. The weekly and daily charts of both indices are positive and show no signs of a top, but trading in value stocks seems to have gotten a bit too popular.

The November Bank of America survey of managers, which together have $526 billion under management, noted that “24% of surveyed investors expect value stocks will outperform growth stocks, highest since February 2019”. In 2019, the ratio subsequently made a new high three months later in May, and growth has been much stronger since then.

The view that growth stocks may again outperform value in the next few months is tied not only to the sharp rise in bullish sentiment favoring value, but also from the technical outlook. With one day left in the month, the Invesco QQQ Trust (QQQ) is up 11%. The weekly chart shows that the flag formation (lines a and b) is still intact despite this nice gain.

A decisive close above the September high of $303.06 will complete the formation. The weekly starc+ band at $318.74 is 6.6% above Friday’s close. The initial chart targets from the formation are in the $330-$340 area. The rising 20-week exponential moving average (EMA) at $275.63 is now good support.

The Nasdaq 100 advance/decline line made another new high last week, which means prices should follow. It would take a drop below the rising weighted moving average (WMA) and the recent low to weaken the outlook.

In contrast to the QQQ, the more value-oriented iShares Russell 2000 (IWM) is up 20.4% so far this month. It closed just 0.6% below this week’s starc+ band at $185.56. The chart shows that it broke out above the upper boundary of its trading channel (line a) three weeks ago.

The Russell 2000 A/D line is rising sharply, but has not overcome the high from January 2020 (line c). That the A/D line is performing weaker, not stronger, than prices is reason to be cautious. This negative (or bearish) divergence will take some time before it can be resolved.

From the weekly charts, the IWM is much more extended on the upside than the QQQ. This suggests that QQQ is ready to outperform IWM in December. This may mean that the QQQ will start rising more sharply than IWM, or alternatively that IWM will correct more sharply than the QQQ.

The gains last week were impressive, but in my view, there are still some averages and ETFs that are in a high-risk area. If we do not get the sharp but brief correction I have been looking for, it is possible we will just see more sector rotation as we head into the end of the year. There are a number of stocks that are just completing their corrections from the October highs, such as JinkoSolar Holding (JKS), which I featured in this Tweet.

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Source: Forbes – Money