Risk-off is Back in Style

Thanks to all who braved the weather to attend the Learn2Quant conference in New York on Friday. For those unable to make it, I'll share the slides from my presentation on "How to be Factor Aware” once they're available.

In the past couple of notes, we've discussed a framework that would give us more confidence in the market experiencing a real recovery vs. a short covering rally. Specifically, if factor returns for Profitability, Market Sensitivity, and Volatility were to see simultaneous strength, it would be a positive indication of a sustainable market rebound.

Last week, we did observe a nascent rally in Profitability, while Market Sensitivity performance was flat to up. Meanwhile, Volatility saw a slight downtick after a short-lived post-midterms rally, and we promised to keep an eye on it before getting too ahead of ourselves. Unfortunately, we've observed weakness in Market Sensitivity and continued weakness in Volatility, leading us to be more cautious in our optimism for the time being.

First, taking a brief look at the broader market, we can see our US Market factor is down 2.54% since our last note (Nov 8th).

US Market

Volatility

The end of October saw a substantial short covering rally (+1.86% from 10/30-11/1), and the factor saw some strength the day after the midterms - but started to falter the day after. Since then, Volatility has fallen -1.63% (11/8 - 11/15), suggesting that risk is still being taken off the table. Of the many potential contributors here, the market was digesting bad guides down from some bellwether tech companies like AMD and NVDA.

Market Sensitivity (Beta)

Last week, we observed a muted beta rally after the midterms, and then watched as the factor gave back some of those returns. Since then, the factor has seen some weakness (down -1.05% in the past week), and just crossed into negative cumulative return territory MTD (-0.02%).

Profitability

Towards the end of last week, we saw the green shoots of a rally in this factor after a few days of slightly positive returns. While Profitability is still slightly up MTD (+10bps), we can see a reversal of that upward trend over the past couple of trading days, indicating that the factor is not necessarily off to the races just yet.

Conclusion

All told, this week has shown us that investors are back to selling risk, and we do not yet see the joint upswing between Volatility, Beta, and Profitability that would indicate a sustained market rally. We'll keep an eye on all of the above factors and update you next week on any further movement.

Regards,
Omer