Why the ‘extreme’ stock-market rotation from growth to value now signals a ‘pause’ is at hand

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Rotation is the theme.

Mohd Rasfan/Agence France-Presse/Getty Images

Feeling dizzy?

Rotation has been the watchword in the stock market this week as optimism inspired by progress toward a COVID-19 vaccine prompted investors to dump many of the highflying stocks of 2020 that benefited most from the stay-at-home trend during pandemic and snap up shares of companies that would benefit from economic recovery.

See: Investors need to brace for a ‘violent’ rotation into cyclicals, value stocks, Lee says

That’s translated into a dash for value stocks, equities viewed as undervalued versus a metric such as book value, at the expense of growth stocks, which promise above-average earnings growth. But the scale of that rotation quickly hit a historical extreme, which suggests it may be time for a breather, according to Tony Dwyer, chief market strategist at Canaccord Genuity.

Also read: 2 days doesn’t make a trend, say strategists. Here’s what they’re saying about tech stocks and the rotation into value

He offered the chart below in a Wednesday note, tracking the relationship between the Russell 1000 Growth Index RLG, -2.61%, the Russell 1000 Value Index RLV, and the large-cap benchmark S&P 500 SPX, +0.88% :

Canaccord Genuity

“The underperformance of the Russell 1000 Growth (RLG) vs. Value (RLV) Indices over the past 10 days has reached a level that suggests a temporary pause in the strong relative performance for the RLV and the broader S&P 500 (SPX),” Dwyer wrote.

Dwyer said that over the past year, when the RLG/RLV ratio hit minus 6 or lower, the RLG saw a bounce as the S&P 500 index pulled back. Before the last three occurrences, he emphasized, “you have to go back to September 2008 to reach the current level of relative underperformance of the RLG versus the RLV.”

The rotation did appear to be pausing on Wednesday. The RLV was off 0.2% while the RLG gained 1.8%. For the week, the value index remains up more than 5%, while the growth index is off 1.5%. The S&P 500 was up 0.9% in recent trade, changing hands not far below its Sept. 2 record close.

Meanwhile, the tech-heavy Nasdaq Composite COMP, +1.92%, which was battered this week as investors dumped tech shares, was up 2% on Wednesday, trimming its week-to-date decline to around 1%. The Dow Jones Industrial Average DJIA, +0.24%, which has outperformed this week as investors snapped up stocks more sensitive to the economic cycle, was up just 0.3% Wednesday, leaving it 4.2% higher for the week.

Related: Nervous about tech stocks as investors rotate to value? This chart won’t help

Dwyer, who remains bullish in his long-term outlook, said he would look to “add risk” on a temporary pause.

The broad market has spiked “following a mixed election and the news of a highly effective Covid-19 vaccine, and we continue to see new highs in Covid-19 cases and the Trump administration has still not conceded,” Dwyer said. “We look to take advantage of any pullback in the SPX and RLV over coming weeks as the market digests the recent gains.”