By Mark Hulbert, MarketWatch
CHAPEL HILL, N.C. (MarketWatch) — Preparations are already underway for celebrating the bull market’s second birthday on March 9.
But, even as we ready ourselves for that celebration, it’s becoming abundantly clear that we need to also be preparing for a big shift in which sectors will be leading the bull market in its third year of life.
TRADING STRATEGIES: MARCH
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That shift would be away from the small-cap and growth sectors toward large-cap and value. While it was entirely normal for those small-cap and growth sectors to have led the market higher during the earlier phases of this bull market, it is increasingly surprising that they continue to do so. The typical pattern during prior bull markets is for the shift toward the large-cap and value ends of the spectrum to have occurred well before the two-year mark.
To be sure, such a shift has been widely anticipated for some time and, at least so far, predictions that it was imminent have been premature. But, with each passing month in which the small-cap and growth sectors have continued to be strong, the odds in favor of large-cap and value become that much stronger.
February was yet another month of postponing the seemingly inevitable shift. According to Wilshire Associates, the index provider, the large-cap value sector gained just half as much during the month as the small-cap growth sector.
Eventually, however, the shift in market leadership will take place, and when it does, the advantage that large-cap has over small-cap, and value over growth, will be enormous. According to calculations made by Jeremy Grantham, the chief investment strategist at Boston-based GMO, the large-cap value sector has never been more undervalued than it is today, relative to small-cap growth stocks.
One caveat as you plan your trading strategies for March: To the extent the Federal Reserve continues to deploy more monetary stimulus, thereby inducing investors to favor riskier stocks, small-cap growth may continue to outperform large-cap value for yet a while longer. As Grantham concedes, relative valuation “is a weak force” over the short-term. However, he quickly adds, “it becomes a monster over several years. Like gravity, it slowly wears down the opposition.”
One easy way to bet on a shift in leadership would be to purchase an exchange-traded fund that focuses on the large-cap value sector, such as the iShares Morningstar Large Value Index fund /quotes/comstock/13*!jkf/quotes/nls/jkf (JKF 63.32, -0.35, -0.55%) . Another option is to bet on the relative performance of large-cap value over small-cap growth, without making a bet on the direction of the market itself. In that case, you could purchase the iShares ETF mentioned earlier in this paragraph while simultaneously shorting an equal dollar amount of the iShares Morningstar Small Growth Index fund /quotes/comstock/13*!jkk/quotes/nls/jkk (JKK 88.31, -1.32, -1.47%) .
If you’re interested in specific large-cap value stocks to bet on, here’s a list of such stocks that are currently most popular among the investment advisers monitored by the Hulbert Financial Digest. I list them in descending order of their popularity:
—Johnson & Johnson /quotes/comstock/13*!jnj/quotes/nls/jnj (JNJ 60.70, -0.74, -1.20%)
—Abbott Laboratories /quotes/comstock/13*!abt/quotes/nls/abt (ABT 47.50, -0.60, -1.25%)
—Wal-Mart Stores Inc. /quotes/comstock/13*!wmt/quotes/nls/wmt (WMT 52.07, +0.09, +0.17%)
—Procter & Gamble Co. /quotes/comstock/13*!pg/quotes/nls/pg (PG 62.74, -0.31, -0.49%)
—Pfizer Inc. /quotes/comstock/13*!pfe/quotes/nls/pfe (PFE 19.14, -0.10, -0.52%)
Mark Hulbert is the founder of Hulbert Financial Digest in Annandale, Va. He has been tracking the advice of more than 160 financial newsletters since 1980.
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