Momentum Update

This week we’ll check back in on Medium Term Momentum after last week’s crash, which we initially discussed last Wednesday in our Midweek Flash Report.

Below is a chart of the pure Momentum Factor (in our US model) since its recent peak on 8/27/19. As we can see, after the major downward move last week, the factor found a bit of stability this week and has started to rebound over the past three days.

‍Cumulative Return: Medium-Term Momentum (9/13/19 - 9/19/19)

On a normalized basis, Momentum is now nearing -3 standard deviations below the mean:

The last time it reached these depths was on 1/2/18, bottoming out at -3.19 SD below the mean on 1/5/18 and then rapidly rebounding over the next two months.Decomposing the Russell 1000 Momentum PortfolioNext we’ll take a look at our Russell 1000 market-neutral Momentum portfolios. As a reminder, the methodology we used to build these portfolios was:1. Create a daily filter for the Russell 1000, where all tickers with a z-score exposure to Medium Term Momentum of > 1.0 are added to a long-only equally weighted portfolio, and all tickers with a z-score of < -1.0 are placed in a short-only equally weighted portfolio.2. Combine the two portfolios into one Long/Short portfolio that is a) market neutral, b) equal weight, and c) rebalanced each day to remain equally weighted.A look at the Long-Only vs. Short-Only portfolios shows a reversal in the predominant trends that we’d seen last week, with the short side peaking at 19.04% on 9/16 and reverting to 13.76%:

‍Cumulative Return: Russell 1000 Short-Only Momentum (8/27/19 - 9/19/19)

The short book continued to be driven by Energy, Materials, and Capital Goods, with Energy still doing most of the heavy lifting.

Cumulative Return: Russell 1000 Long-Only Momentum (8/27/19 - 9/19/19)

‍The long side (stocks with high exposure to Momentum) hit a trough of -8.21% on 9/13 and has since reverted to -6.06%.

Software remained the chief negative sector contributor in the long book, although there was a slight easing of the pain as it went from -4.68% last week to -4.03% on 9/19.

All told, while Momentum remains in Extremely Oversold territory, it appears that the rotation out of Momentum and into Value has started to slow, driven by optimism over trade and positive US economic data.

‍This Week's Market and Factor Update:

US Market (9/13/19 - 9/19/19)

• The market was flattish over the week and then finished lower on Friday (not captured in above chart), as investors digested news that a Chinese agriculture delegation had canceled a visit to Montana - dimming optimism about ongoing trade talks.
• Yields on US Treasuries reversed earlier gains as investors bought government debt and sold stocks on the latest China news.
• The Fed cut its overnight lending rate by 25bps on Wednesday to little fanfare, and remained tight lipped on any future plans.
• The NY Fed injected $128B into the market between Tuesday and Wednesday, as overnight lending rates spiked - calling into question the Fed’s ability to smooth out short term rates.

‍US Model

• Growth continued its free-fall, now deep in Oversold territory with what looks like more room to the downside.
• Market Sensitivity and Volatility both continued to gap up, with Volatility reaching positive normalized territory and beta just about to touch the mean.
• Profitability fell 0.34 standard deviations, landing in negative territory.
• US Total Risk (using the Russell 3000 as proxy) saw a slight reduction to 15.33%.

‍Worldwide Model

• Value was again the biggest winner in the global model, up 1.85 standard deviations in the past two weeks.
• Earnings Yield saw another sizable move up, now sitting back in positive normalized return territory.
• As we’d seen in the US, Market Sensitivity and Volatility both reverted into positive space.
• Profitability continued its decline, receiving an Oversold designation.
• Global risk (using the ACWI as proxy) fell slightly more than risk in the US.

We'll continue to keep an eye on Momentum (and the rest of these factors) as we head into the fall. Please reach out if you'd like to better understand your portfolio's exposure to factors like Momentum and how it can be managed.

Regards,
Omer