Momentum is Reverting

For the past few weeks, we've been closely following Medium-Term Momentum as it sharply climbed into Overbought territory. While we've talked about this factor a lot recently, it's been a very active signal in both our US and Global models, and we're now observing that Momentum is currently at an inflection point.

As a reminder, we define Medium-Term Momentum as cumulative return over the past 12 months excluding the most recent month.

US Model

At the beginning of the summer, Medium-Term Momentum was a Neutral factor, hovering around +0.05 standard deviations above the mean on 6/21. Over the next few weeks, returns fell to a mid-July trough of -1.56 SD below the mean. The factor then staged a sharp rally until hitting a peak of +1.87 SD above the mean on 9/13. Since then, we've witnessed a strong pullback on a cumulative (-1.21%) and normalized (+1.87 SD > +1.24 SD) basis.

Global Model

At the worldwide level, we see a similar, but even steeper pattern. Sitting in Neutral territory at the beginning of the summer, Medium-Term Momentum sold off on a normalized basis until bottoming out at -1.41 SD below the mean on 8/7. Returns then rocketed up to a 9/14 peak of +2.26 SD above the mean, and have since seen a dramatic downtick on both a cumulative (-0.6%) and normalized (+2.26 > +1.79 SD) basis.

The sectors that are currently most correlated with Medium-Term Momentum continue to be Software, IT, and Semiconductors.  

Regards,
Omer