Thursday, January 10, 2008

Growth vs Value: A Short Reversal?

Growth stocks have been trouncing value stocks since last summer. The financial-heavy value indices have been lagging severely behind value indices during the current housing recession. This has benefited growth stocks as the VIX set new highs and risk aversion picked up.

Could value stocks make a temporary come back here after 6 months? I think so. Plotting growth vs value, we see the enormous outperformance of the Rydex Pure Growth index relative to the Value index. But the negative divergence on the daily and weekly RSI, the channel throwover, as well as the extremely overbought MACD seems to suggest a short-term comeback for value stocks is due. Previous periods where growth lagged value during the current advance has lasted half a month on average. Bottom line: overweighting the value stocks for the next 2-3 weeks should generate some decent alpha.

Strategy: Buy financial stocks with above average short % of float to benefit from the shortsqueeze. Aggressive investors should buy some January call options.

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