Chart Advisor: Comparing Growth and Value

Articles From: Investopedia
Website: Investopedia

By Foram Chheda, CMT

1/ Growth Vs. Value

2/ A Strong Bull Rally Never Discriminates

3/ Technical Setup Growth (SPYG) and Value (SPYV) 

4/ Where Do We Find a Bit More of Alpha?

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1/ Growth Vs. Value

Equity markets are often divided into growth and value stocks, with growth stocks representing companies poised for rapid expansion, prioritizing reinvestment, while value stocks encompass established firms considered undervalued based on fundamental metrics, often characterized by stable performance and dividend payments.

Growth stocks tend to outperform during economic expansions and low-interest-rate environments. Value stocks tend to outperform during economic contractions and when there’s a shift toward higher interest rates.

2/ A Strong Bull Rally Never Discriminates

However, a strong broad-based bull run never discriminates between the two. Both Growth and Value stocks may move higher during broad market rallies or bull markets. Positive economic conditions, strong corporate earnings, and overall market optimism can simultaneously increase growth and value stocks. On a YTD basis, both Growth and Value space returned respectable returns. 

Courtesy of StockCharts.com

We represent the group of Value stocks through SPDR S&P 500 Value ETF (SPYV) and Growth Stocks through SPDR S&P 500 Growth ETF (SPYG). A relative comparison of the Year-to-Date (YTD) performance shows a clear out performance by the Growth ETF as SPYG gained 26.59%. During the same period, the Value ETF (SPYV) returned 14.76%. It not only underperformed Growth (SPYG) but also the broad market index S&P 500 which returned 20.40%. 

3/ Technical Setup Growth (SPYG) and Value (SPYV) 

Courtesy of StockCharts.com

If the technical setup of both SPYG and SPYV is examined individually, both the charts look equally buoyant. Both SPYG and SPYV have attempted to take out their major tops and are seen attempting a breakout. However, a closer look reveals a few signs of fatigue with the Growth stocks. In the case of SPYG, RSI is seen negatively diverging with it failing to mark a new high along with the price. Also, the RS line against the broader SPX is in a declining trajectory. 

On the other hand, SPYV has also made a breakout; the RS line against the SPX is also seen rising and in a firm uptrend.

4/ Where Do We Find a Bit More Alpha? 

Courtesy of StockCharts.com

The picture gets clearer when we compare one against the other. When we compare Value (SPYV) against Growth (SPYG), the RS line tells us that the Growth stocks relatively outperformed the value stocks for the first ten months of this year. However, over the past few weeks, the RS line of Value against Growth stocks has reversed its trend; it is seen firmly moving higher and has crossed above its 50-period MA.

In a nutshell, if the broad bull run continues, we may see both the pockets, i.e., the Value and Growth stocks rising individually. However, over the coming week, we can fairly expect the Value stocks to generate alpha over the Growth stocks.

Originally posted 14th December 2023

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