Markets

There's a sudden transformation taking place in the stock market and it's unnerving some investors

Key Points
  • Value stocks — those with low multiples and stable fundamentals — significantly outperformed their growth counterparts on Monday.
  • Data compiled by Bespoke Investment Group showed this was momentum's worst daily performance relative to value since its inception in early 2013.
  • This shift is unnerving to investors because growth stocks, those defined by their large growth expectations relative to the broader market, have outperformed value stocks in recent years. Also the move has been so rapid.
  • A rotation away from these stocks could result in a downturn for the broader market, some fear.
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The market got turned upside down Monday in rapid fashion underneath the surface and some investors think it may be a warning signal.

The S&P 500 closed little changed for the session, but value stocks — those with low multiples and stable fundamentals — significantly outperformed their growth counterparts. The iShares Edge MSCI USA Value Factor ETF (VLUE) jumped 1.8% on Monday while the iShares Edge MSCI USA Momentum Factor ETF (MTUM) dropped 1.7%. Data compiled by Bespoke Investment Group showed this was momentum's worst daily performance relative to value since its inception in early 2013.

The value fund rose again Tuesday, closing 1.4% higher while the momentum fund dropped another 1.5%. The momentum fund was also headed for its third straight decline.

This shift is unnerving to investors because momentum stocks, those defined by their large growth expectations relative to the broader market, have outperformed value names in recent years. A rotation away from these stocks could result in a downturn for the broader market.

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"The rotation, despite it being a positive signal in terms of investor macro sentiment, is probably a net negative for the overall SPX in that super-cap tech will likely be caught up in the selling and these stocks dominate the index weighting," Adam Crisafulli, executive director at J.P. Morgan, said in a note.

Momentum or growth stocks have blown their value counterparts out of the water over the past five years. In that time, the MTUM exchange-traded fund is up more than 130% while VLUE has gained nearly 70%. This year has been no different.

Growth stocks have also outperformed the S&P 500 over the past five years. The broad index has jumped 108% in that time.

Most of the top-performing S&P 500 stocks this year are growth names. Seven of the 10 best-performing stocks in the benchmark — including Chipotle Mexican Grill, Advanced Micro Devices and MarketAxess Holdings — have a much higher valuation relative to the broader index, FactSet data shows. Monday's session was the complete opposite to the year's trend.

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The worst-performing stocks of 2019 outperformed on Monday while the year's biggest advancers lagged, according to SentimenTrader. This year's worst performers rose 3.5% on Monday while 2019's biggest advancers slid 1.4%, the reseach firm said.

Small-cap stocks flashed another signal that investors may be rotating out of the year-to-date winners and into 2019's laggards. The Russell 2000 surged 1.3% on Monday while the S&P 500 closed just below the flatline. Year to date, the Russell is up about 13%, lagging the S&P 500 by about 5 percentage points.

The S&P 500 is up nearly 2% this month and is about 1.6% below its record high set in July amid optimism around U.S.-China trade relations. However, CNBC's Jim Cramer urges investors to be cautious at these levels, especially after the rotation that took place Monday.

— CNBC's Michael Bloom and Jeff Cox contributed to this report.

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