Revisiting Oil & Gas + Value

In our May 11th Factor Spotlight, we highlighted that the Oil & Gas sector and Oil commodity factors were being flagged as Overbought in both our US and Macro models. We also discussed the potential readthrough to the Value factor, which was the most correlated factor to Oil & Gas at the time.

In the intervening weeks, these factors have seen a sharp selloff on a cumulative and normalized basis, underscoring the importance of tracking near and long-term factor trends to be aware of the potential for these types of moves. Here's a quick recap:

Oil, Gas, & Consumables

• In the US market, the Oil, Gas, & Consumable Fuels sector had seen a huge rally, with cumulative returns hitting a May 21st peak of +8.4% and then rapidly falling to +3.84% on June 7th.
• Meanwhile, normalized returns hit a peak of +2.99 SD above the mean on May 2nd, and have quickly reverted to -0.43 SD below the mean (Neutral) with seemingly more room to fall given the shape of the curve.

Oil Factor

The Oil commodity factor in our US Macro model had also seen a big rally after bottoming out in mid-March, but has since undergone an even brisker correction.

• In our previous email, the commodity had seen +14.78% cumulative return YTD and was +1.43 SD above the mean on a normalized basis.
• After hitting a peak of +16.54% (cumulative) and +1.54 SD above the mean (normalized) in the following two weeks, returns rapidly corrected down to +5.19% (cumulative) and -1.47 SD below the mean (normalized).
• Our Factor Profile now flags this factor as Oversold, although again we don't see any flattening of the curve at this point.

Energy Select Sector SPDR

Taking a look at the XLE, we can see a similar move. On May 21, shares were up +9.97% YTD, and are now at +7.38%, highlighting the real world application of these factor trends.

Value

In the previous email, we mentioned that the Value factor was the most correlated factor to the Oil & Gas sector (35% correlation) and could see a corresponding pullback. This hypothesis played out very well over the past month:

• YTD cumulative return peaked at +0.46% on May 15th, and sits at 0% today.
• On a normalized basis, Value was +2.06 SD above the mean on May 16th, and has since fallen to just +0.12 SD above the mean.

We'll continue to call out factors that we see approaching points of inflection and sharing our expectations for second-order effects.

If you'd like to see the impact of any of these factors on your portfolio's performance and risk profile, or would like to better understand how we measure the relationships between factors, please don't hesitate to reach out.

Regards,
Omer