A PDF version of this commentary can be downloaded here.
Without a doubt, most recaps this week will be about the Greek debt deal, where Greece received a 4-month financial aid extension and in-turn agreed to honor all its debts. Markets seemed to take the news positively with the iShares European Monetary Union ETF (EZU) up 1.88% on the week and 1.58% on Friday alone. But we’ll leave it to the economists to speculate as to whether the game “kick the can down the road” is ultimately positive or negative for European growth in the long-run.
So with everyone’s eye off of the U.S., we thought that’s where we’d spend a bit of time this week. In particular, we want to focus on the relationship between value and glamour stocks. Our models are indicating that glamour momentum is beginning to reach extreme levels, a sign that markets may soon swing in favor of value. The last extreme glamour momentum reading we saw was on 2/7/2014. By the time our indicators peaked in favor of value extremism on 4/10/2014, large-cap value (IWD) outperformed large-cap growth (IWF) by 348 basis points. While we don’t usually try to capture such short-term market trends, they are powerful currents to be aware of.
Below we’ve built a simple model to demonstrate how these trends evolve over time. To determine if momentum is in favor of growth or value, we simply take the ratio of a value ETF versus a growth ETF and see if that ratio is above its 200-day moving average. If it is, momentum is in favor of growth; if it is below, momentum is in favor of value.
We do this daily for 9 different ETF pairs (representing large-, mid-, and small-cap equities for Russell, S&P, and Vanguard methodologies) and add up the results to create a diversified composite score.