Value Stocks Surge Past Growth as Hedge Funds Unwind: Is the Rotation Just Getting Started?

Value stocks are having their moment in the sun, and for once, it isn't just another head fake. Since November, the Russell 1000 Value Index has outpaced its Growth sibling by a staggering 14%. That's not a typo. In a market obsessed with AI, cloud, and whatever flavor of tech is trending on TikTok, the old-economy dinosaurs are suddenly running the show. The question is whether this is a fleeting rotation or the start of a deeper unwind in the growth trade that has dominated for years.

Let's not sugarcoat it: the last few sessions have been brutal for the crowded tech complex. Goldman Sachs says big hedge funds just had their worst day in almost a year, as the AI selloff steamrolled the most popular trades. The $XLK ETF, a proxy for US large-cap tech, is stuck at $137.94, flatlining after months of relentless inflows. Meanwhile, the S&P 500 sits at $6,826.96, refusing to budge, as if daring traders to pick a side. Value stocks, on the other hand, are quietly grinding higher. The BDC sector is trading at a 20%+ discount to NAV, and even the most jaded value managers are starting to sound like true believers again.

The macro backdrop is adding fuel to the fire. January layoffs hit their highest level since 2009, with US employers announcing 108,435 job cuts. Jobless claims are rising more than expected, but the labor market isn't cracking, yet. Investors are bracing for next week's CPI print, which could be the final nail in the coffin for the "higher for longer" interest rate narrative. If inflation surprises to the upside, expect value to keep outperforming as rate-sensitive growth names take another beating.

But let's not get carried away. Value's outperformance has been a recurring mirage in this market. Every time it looks like the rotation is real, tech comes roaring back and value gets left holding the bag. This time, though, there are real cracks in the growth story. The AI trade is overcrowded, and the unwind is getting messy. Hedge funds are de-risking, and the pain could get worse before it gets better. If you're still hiding in mega-cap tech, it's time to check your exits.

Cross-asset correlations are telling their own story. Commodities, as measured by $DBC at $23.83, are going nowhere fast. The market is in risk-off mode, but not in full panic. The real action is under the hood, where the rotation from growth to value is picking up steam. The last time we saw this kind of divergence, it didn't end well for the consensus trade.

The history lesson here is brutal. In 2000, value outperformed growth by 30% over the next two years as the dot-com bubble unwound. We're not saying this is a repeat, but the setup is eerily similar. Crowded trades, stretched valuations, and a macro backdrop that's shifting under traders' feet. Ignore the rotation at your own risk.

Strykr Watch

Technically, the S&P 500 is stuck in no-man's-land at $6,826.96. Support sits at $6,750, with resistance at the psychological $7,000 level. The $XLK ETF is pinned at $137.94, with a key breakdown level at $135. Value indices are breaking out, with the Russell 1000 Value Index testing multi-month highs. RSI readings on growth ETFs are rolling over, while value is just getting started. The rotation is real, at least for now.

The risk is that this is another false dawn for value. If tech stabilizes and rates stay low, expect the old regime to reassert itself. But if the unwind continues, value could have a lot more room to run. Watch the CPI print next week, it's the catalyst that could tip the scales.

The bear case is simple: if the economy slows and earnings disappoint, value stocks won't be immune. The rotation could turn into a stampede for the exits. But for now, the pain trade is higher for value and lower for growth.

Actionable opportunities are everywhere. Long value ETFs on dips, short crowded tech names that have lost momentum, and play the spread between value and growth. If the rotation is real, there's a lot more juice left in this trade.

Strykr Take

This isn't just another head fake. The rotation from growth to value is real, and it's just getting started. Ignore it at your own risk. The pain trade is higher for value and lower for growth. Get on the right side of the trade, or get out of the way.