BUY LARGE CAP VALUE VERSUS LARGE CAP GROWTH AT THE HISTORIC EXTREME
Large Cap Value is now more oversold versus Large Cap Growth than it has been in the past 40 years.
Although the long-term trend for Large Cap Growth outperformance will continue, the current extreme will most likely reverse for a time-period ample enough for TPA clients to benefit. TPA recommends that clients buy the top 10 stocks in the Russell 1000 Value ETF (IWD) versus the top 10 stocks in the Russell 1000 Growth ETF (IWF).
Although TPA will show in this report that there is a 50% potential profit if the Large Cap Value vs. Large Cap Growth merely moves back to its long-term trend, TPA’s intermediate target is +25%. The stop is -6%).
This recommendation is a departure from the constant theme that TPA has reiterated for the past 4 months. TPA has rightly been telling clients that there is a new group of safety stocks. These megacap TECH stocks have done well for clients as they either are immune to or benefit from the Pandemic. The World Snapshots below told clients to stick with these stocks and that has worked out very well:
TPA Reports:
8/19/20 Stick with the new safety stocks
8/10/20 Outperformance demands adherence to long term patterns
7/31/20 How to avoid sad performance for the rest of 2020
6/10/20 TPA clients should still be in the 2020 winners
4/8/20 Picking up the trash - what to keep and throw away
TPA continues to recommend AMZN, NFLX, AMGN and other 2020 winners, but the extreme performance discrepancy between large-cap value and growth is now too big to ignore.
The tables below show the top 10 large-cap value and large-cap growth stocks for TPA’s recommendation. TPA’s reasoning will follow the charts and tables below.
CONSTITUENTS
Large Cap Growth is mostly TECH stocks, with over 55% concentrated in Internet, Software, Computers, and SEMI’s. Large Cap Value is more diverse. The largest component is Banks, at only 7.9%. So, Large Cap Growth is a sector lopsided bet.
EXTREMES
The chart below shows the ratio of the Russell Large Cap Value Index / Russell Large Cap Growth Index. The current level is lower than it has been in the past 40 years.
RSI analysis of the ratio of the Russell Large Cap Value Index / Russell Large Cap Growth Index shows that the ratio is now more oversold than it has been in the past 40 years (monthly RSI=11.3). The ratio has rallied between 11% and 112% when it has reached the RSI=20 extreme. The rally timeframes have been between 6 months and 2 years.
The relative performance chart of the top 10 stocks in IWD (Russell Large-Cap Value ETF), IWF (Russell Large-Cap Growth ETF), and the S&P500 is shown below. 2020 YTD, the IWD Top 10 is down 10%, the IWF top 10 is up 66%, and the S&P500 is up 6%.
The relative performance chart of IWD top 10, IWF top 10, and the S&P500 shows that, although large-cap growth has been outperforming for years, the last 6 months has proven to be extreme.
LONG-TERM TREND EXTREMES
The chart of the ratio of the IWD top 10/IWF top 10 shows that the Pandemic has moved the ratio far away from its long-term gradual downtrend. It is this extreme that buying the top 10 large-cap value stocks versus the top 10 large-cap growth stocks seeks to exploit.
The chart of the ratio of the IWD top 10/IWF top 10 with annotations below shows that a reversal just back to the 4-year downtrend line would be a 50% rally from current levels. Historically this would take 2 years. TPA’s intermediate-term target is only +25%.
ALWAYS REMEMBER: No strategy exists in a vacuum – always evaluate the relevant sector & market.
Over 80% of portfolio performance is determined by sector and market forces (Ibbotson & Kaplan study – January/Febuary2000)
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Turning Point Analytics (TPA) is only one of many tools that an investor should use to make a final investment decision. TPA is an overlay on top of a client’s good fundamental or macro analysis. TPA does not create or provide fundamental analysis. The information in this communication may include technical analysis. Technical analysis is a discipline that studies the past trading history of a security while trying to forecast future price action. Technical analysis does not consider the underlying fundamentals of the security in question and it does not provide information reasonably sufficient upon which to base an investment decision. Investors should not rely on technical analysis alone while making an investment decision. Before making an investment decision, investors should consider reviewing all publicly available information regarding the security in question, including, but not limited to, the underlying fundamentals of the security and other information which is available in filings with the Securities and Exchange Commission. The information and analysis contained in reports provided by TPA are copyrighted and may not be duplicated or redistributed for any reason without the express written consent of TPA. The information in this communication is for institutional or sophisticated investors only. By accepting this communication, the recipient agrees not to forward, and/or copy the information to any other person, except as permitted, or required by law. TPA does not guarantee accuracy or completeness. TPA is a publisher of technical research and has no investment banking or advisory relationship with any company mentioned in any report. Reports are neither a solicitation to buy nor an offer to sell securities. Past performance is in no way indicative of future results. Opinions expressed are subject to change without notice. TPA will provide, upon request, the details of any past recommendations. TPA’s analysis and recommendations should not be used as the sole reason to buy or sell any security. TPA may compensate brokers and intermediaries for sales and marketing services. You understand and acknowledge that there is a very high degree of risk involved in trading securities and/or currencies. The Company, the authors, the publisher, and all affiliates of Company assume no responsibility or liability for your trading and investment results. It should not be assumed that the methods, techniques, or indicators presented will be profitable or that they will not result in losses. Statements, data, and analysis made by TPA or in its publications, are made as of the date stated and are subject to change without notice. TPA and/or its officers and employees may, from time to time acquire, hold, or sell a position in the securities mentioned herein. Upon request, TPA will furnish specific information in this regard. TPA will not be held liable for losses caused by conditions and/or events that are beyond TPA’s control, including, but not limited to, war, strikes, natural disasters, new government restrictions, market fluctuations, and communications disruptions.
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