With markets staging a big comeback rally today, analysts are wondering if this is just an oversold bounce, or if there are actually some legs behind this move.
The markets have been clambering higher this morning on news that the Federal reserve indicated that it will step in if required to ease monetary policy and save the economy, as well as trade tensions softening amid comments by China and Mexico.
The Dow Jones Industrial Average climbed 207.39 points, or 0.82%. The S&P 500 rebounded 0.82% as well and the Nasdaq Composite rallied 0.64%. Stocks that have been hit hard during the month-long sell-off led Tuesday’s comeback, including Apple and bank shares.
Mike Santoli on CNBC explained, “Yesterday had a big impact on the growth versus value interplay that we watch all the time, since we know it has been a growth-dominated market for a long time.”
When looking at a comparison of the iShares Russell 2000 Growth ETF (IWF) versus the iShares Russell 1000 Value ETF (IWD), Santoli pointed out the prevailing trend between the two ETFs, and gave an analysis of the current environment to see which area is dominating the rally today.
“It peaked in a spread of basically 6 or 7 percentage points back when the market peaked. Both declined basically around the same angle. But looking at it over the last month or so, and particularly yesterday, yesterday was the biggest bump in value over growth that we’ve seen this year. We are seeing a weaker bounce in growth today. The big question is: Yesterday’s shakeout in software and Fannie stocks, is that something enduring, or was that just a representation of that was one of the last places people were hiding, and maybe that just meant the market as a whole was due to bounce? We gotta watch this to see if there’s a change in character for the overall market,” Santoli explained.
Growth stocks are often associated with high-quality, prosperous companies whose earnings are expected to continue increasing at an above-average rate relative to the market. Growth stocks generally have high price-to-earnings (P/E) ratios and high price-to-book ratios.
However, at times, growth stocks may be seen as exorbitant and overvalued, causing some investors to favor value stocks, which are considered undervalued by the market. Value stocks tend to trade at a lower price relative to their fundamentals (including dividends, earnings, and sales). While they may have generally have solid fundamentals, value stocks they may lost popularity in the market and are considered bargain priced compared with their competitors.
ETFs like the IWF and the IWD offer investors the chance to express their market view without investing in individual stocks, gaining broader exposure and more diversification.
Relative Value ETF Plays
For investors looking to capitalize on this shift towards value, they can play the Direxion Russell 1000 Growth Over Value ETF (NYSEArca: RWGV). RWGV offers them the ability to benefit not only from growth opportunities potentially performing well, but from their outperformance compared to value.
Conversely, if investors believe that value-oriented equities will outperform growth-oriented equities, Direxion Russell 1000 Value Over Growth ETF (NYSEArca: RWVG) provides a means to not only see value opportunities perform well, but as a way to capitalize on their outperformance compared to growth.
For more relative value investing ideas, visit our Relative Value Channel.