Capturing Weekly Trends through our Extreme Movers Portfolio

This week we place a brief pause on our Surprise Metrics analysis to introduce the Extreme Movers portfolio, another method that can help investors augment their understanding of what is transpiring in the markets. But for those of you who have been closely following the Surprise Metrics over the past several months, no worries; updated tables and our analysis will resume on Jun 4, following a Memorial Day holiday break next Monday. Please reach out to me if you'd like to receive the Surprise Metrics earlier.

Before we dive into the Extreme Movers Portfolio's methodology and this week's analysis, it would be helpful to take a step back and explain why the Extreme Movers portfolio should matter to investors, how it adds value, and how it differs from Surprise Metrics.

Why should Extreme Movers matter to investors?

Since factors are inherently correlated over time, especially during extreme periods, the Extreme Movers portfolio better captures the amount of correlated factor risk in the market, in particular across the style & industry factors. Conversely, when the factors de-correlate the portfolio helps investors understand how much alpha opportunity is available relative to factor-driven performance.

How can Extreme Movers add value to your investment processes?

Think of Extreme Movers as a momentum portfolio with weekly hindsight. It's not necessarily future-actionable, but it provides valuable information on what occurred in the markets during the week from both a factor and alpha-based perspective. For instance, the portfolio can help quickly answer the following questions:

• Was last week an alpha or factor-driven week?
• Were the factor drivers due to a risk-on / risk-off market or a sector-rotation market?

How does Extreme Movers differ from Surprise Metrics?

Surprise Metrics offer a purely factor-based point of view to uncover style, sector, and macro factors that deviated the most from their predicted movements during the prior week. Given the highly volatile factor-driven swings in the market stemming from Russia's invasion of Ukraine on Feb 24, the Surprise Metrics offer investors a lens into understanding the factors that are impacting portfolios the most. In contrast, Extreme Movers looks at both factors and alpha to help give a more rounded snapshot of market activity.

Extreme Movers Methodology

The Extreme Movers portfolio is a weekly-rebalanced, market-neutral portfolio that consists of the top 100 and bottom 100 performing stocks based in the Russell 1000 index. We chose the Russell 1000 because it is a fair representation of the US market, though we will build Extreme Mover portfolios for other US, Global, and International indices over time.

The top 100 performing stocks are equal-weighted longs, and the bottom 100 performing stocks are equal-weighted shorts. This construction allows us to observe the most critical systematic and idiosyncratic forces in the market each week. For example, analyzing the portfolio's performance helps us understand how much alpha opportunity is available relative to how performance is driven by standard style and industry factors. In addition, the portfolio's style and sector exposures provide insight into the DNA of stocks that are in and out of favor at any given point in time.

Our analysis calculates performance attribution and exposures across various risk models to deliver a unique perspective and complete transparency. The models used are the Axioma US4 Medium Horizon, Barra US Equity Model for Long-Term Investors, and the Wolfe QES US Broad v2 models. Performance attribution results are an average across the three models.

As with the Surprise Metric, we include Omega Point's Extreme Movers Portfolio in our Market Summary recap below.

If you have any questions, comments, or would like to analyze your portfolio in Omega Point, please don’t hesitate to reach out.

US Market Summary and Extreme Movers Metrics

US Market: 05/13/22 - 05/19/22

• All three major US indices saw strong rallies at the end of last week before facing fierce downward pressure this week, particularly on Wednesday. The Dow fared the worst over the five trading days ending Thursday, down 150 bps. The S&P 500 lost 75 bps, and the Nasdaq was the sole winner ending up at a slightly positive 15 bps.
• On Tuesday, Fed Chair Jerome Powell emphasized his commitment to fighting inflation in an interview, saying that the Fed will continue to raise rates until inflation is under control.
• With a rise in mortgage rates and persistently high materials costs, homebuilder sentiment fell to a two-year low while retail spending remained hot, rising 0.9% in April.

Extreme Movers Portfolio Performance

By construction of going long the Top 100 movers and short the Bottom 100 movers in the Russell 1000, the portfolio return will always be positive. That said, there are several areas we want to observe around weekly performance:

1. Is the weekly performance below or above the recent median weekly performance? Above means that the Extreme Movers portfolio had much higher dispersion than a normal week, likely driven by higher factor volatility.
2. Is the weekly alpha contribution below or above the recent median alpha contribution? Above demonstrates that the significant market moves were more alpha-driven than in a normal week. Below suggests that the market moves were more factor-driven than in a normal week.

• YTD, the Extreme Movers Portfolio has had a median 18.8% weekly return
• Last week saw the highest dispersion, with the total return at 35.5%, the majority of it being factor-driven. In particular, style factors have driven 22% of the return, well above their weekly average of 5% this year.
• The week of Feb 16 (the week right before Russia invaded Ukraine) saw the highest relative alpha contribution to performance. The past five weeks have been far more factor-driven.

Extreme Movers Portfolio Exposures

Taking a look at the Extreme Movers from an exposure lens helps us decompose the individual styles and sectors associated with the portfolio's factor-driven performance and better understand broader patterns such as risk-on / risk-off or sector rotation.

• The portfolio reversed course dramatically this week from a GICS sector allocation perspective. Information Technology, net short at -32% last week, moved to 13% long, while Consumer Staples moved in the opposite direction from 20% long to 27% short.
• This week’s sector allocations were also directionally different than the year-to-date averages. The portfolio has recently been long Consumer Staples, Materials, and Energy and short Information Technology. This week, the portfolio reversed direction across those key tilts.

• The course reversal was also evident from a style factor perspective. The fear trade in the market was apparent last week as the Extreme Movers Portfolio pushed heavily away from highly volatile small-cap growth stocks and into value and quality. This week, the portfolio had a positive exposure to beta, volatility, and growth, pointing to somewhat of a rebound.
• After underperforming dramatically last week, Crowded stocks moved back into the win column, particularly high Short Interest stocks. The portfolio has recently been underexposed to the HF Crowding as crowded longs have experienced increased downward price pressure in this turbulent market until this week.
• The portfolio was also overexposed to Interest Rate Beta, which has not been a popular exposure lately. Stocks negatively correlating to rates picked up this week though it will likely be short-lived given the inflationary environment and Fed's posture.

Regards,
Kevin