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Options Theory: Is the Value Stock Resurrection Real?

November 13, 2020

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There’s been an awakening. Have you felt it?

For eons, growth stocks have been beating the pants off of value stocks. Typically the performance between both segments teeter-totters between one leading for a spell before passing the baton to the other. But greedy, ego-driven growth has utterly refused to share the limelight for years now. While value stocks have been relegated to the dust bin of has-beens, growth-oriented stocks have gone on to take over the world.

There are many ways to chart the difference between the two. For growth stocks, you can use the iShares Russell 1000 Growth ETF (IWF), or even the Nasdaq-100 ETF (QQQ) will do.

For value stocks, you can use the iShares Russell 2000 Value ETF (IWN), or the Russell 2000 ETF (IWM).

In case you missed it, the gains had during Monday’s monster gap were not evenly distributed. At its highs on Monday, IWM was up 8.8% for the session. By contrast, QQQ was only up 1.5%. The divergence widened on Tuesday when growth stocks continued to get hammered. I’m not one to over emphasize short-term price action, but I’d be lying if I didn’t admit I think this could spell the long-awaited return of value stocks outperforming.

You can see the rotation in greater detail by looking at sector performance. Financials and Energy both boomed on Monday while tech languished. I like banks and small-caps into weakness to capitalize on the potential for continued rotation.

Stocks that count themselves part of the reopening trade are also in the value or small-cap basket. Airlines, restaurants, casinos, Lyft, Uber, you name it. Many of them are forming bullish patterns as I type.

There’s always a chance that Monday’s awakening was a ruse, but I’m betting the size and strength of the move suggests it’s the real deal.

Breakout Filters

When it comes to analyzing the validity of a breakout or the likelihood that the surge will stick, there are three filters you can use: price, volume, and time. Here’s what each suggests about this week’s moonshot.

Price

If a stock pushes through resistance by a few footsteps then it’s not exactly a sure thing. But if it runs past by a mile, then it’s a good bet the breakout is here to stay. Take a look at how high the following popped on Monday: IWM, XLF, XLE, LYFT, LVS, DAL, EXPE, HLT, MAR. Do those look like fake-outs to you?

No, the price filter argues the new uptrends have staying power.

Volume

Participation matters. The degree to which traders buy-in to a breakout reveals whether it has staying power. Low volume breakouts are prone failure. This week was anything but. The explosion in volume showed mass adoption and makes me willing to bet, again, that the breakout sticks.

Time

It’s been five days since Monday’s launch and even though profit-taking has returned some stocks closer to their breakout points, we’re still well above old resistance for virtually every chart I look at. This too weighs in favor on betting that more upside is in store.

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