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:
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.
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.
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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