Turning All the Market Knobs

June 12, 2018

Mish's Daily

By Mish Schneider

blankToday on Twitter, I was asked a question that merits more of an answer than the allotted 280 characters.

“I remember from the late 90’s value stocks found buyers very late into the bullish market. Those who missed momentum stocks that had led the market, bought value hoping it would finally catch up. Do you (me) think some interest in beaten up value is a sign of exhaustion?”

This question intrigues me because, my inclination is to shop for value, while our quants focus on the momentum stocks.

To answer this question fully, we will look at 3 criteria

  1. What does the current value to growth ratio chart show?
  2. How one discerns good value from bad? Which knob should a trader turn?
  3. Do, as my friend asked, the value buyers coming in at this late stage suggest the market is exhausted?


This chart is from our BigView product.

It shows the current prices of the Growth (VUG) and Value (VTV) ETFs. On the bottom is the ratio (as of Monday’s close) between the two.

Both ETFs are in bullish phases. The ratio between the 2 are only slightly above the historical lows.

Value way underperforms the S&P 500.

Quite simply, the run to value is just not there, as per the perception of it. That could mean that the opportunity to see a reversal of this ratio is possible.

I would be more inclined to worry about the signs of exhaustion from this scenario, only if the ratio clears .7010 and heads towards .7297, while VUG begins to turn down under 151.

In fact, which leads me to the second point of the answer, I would (and do) look for value stocks that are outperforming the VTV versus SPY ratio.

As one way to discern good value from bad, the ratio (VTV vs. SPY) is one indicator.

Another is to look at the value stock of interest and ask these questions:

  1. What is the phase?
  2. Is it in a sector or megatrend that has growth potential (like the recent move in Kohl’s, whch helped spur the ETF XRT-or Retail ETF.)
  3. Is the stock just plain “cheap” or is there real value to owning a particular company? This is a good time to study a company’s cash flow and price/earnings to growth ratio. In the case of 3-D Systems, the cash flow has been increasing as well as the P/E to Growth ratio. DDD has rallied 50% since I discovered its value.
  4. Does the risk/reward make sense? Is there a line in the sand to risk against and can the instrument potentially offer at least a 2:1 risk/reward?

Do value buyers late to the party signal a top in the overall market is near?

To help answer that, we have to then examine what impacts value. Rising interest rates will negatively impact “equity income” value stocks.

Utilities, would also be impacted by rising rates-and inflation, should that pick up.

Until the market has turned all the knobs and the door refuses to open, try not to read too much into historical relationships.

For now, enjoy all the ways the door are open for both value and growth.

S&P 500 (SPY) Got right to resistance at 279-280.40. 278 now support to hold

Russell 2000 (IWM) 168-168.28 still the target (even though it got real close at 167.94) if holds 165.

Dow (DIA) 250 cleared so now it becomes support. 255 some resistance

Nasdaq (QQQ) Above 176 will look better. Support to hold 172.50-173

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