Tech Investors Take Note: Growth and Momentum Are Overbought

Today, we'll be taking a break from examining current trade entanglements through the lens of the Exchange Rate Sensitivity factor. Instead we'll check in on Growth and Medium-Term Momentum, two factors that have seen rapid gains in our normalized return framework over the past few weeks. They've both recently been flagged as Overbought and Extremely Overbought, respectively, and now appear positioned to revert in the near term.

Let's first take a look at the past week's market and factor action:

‍US Market (5/31/19 - 6/6/19)

• The market had its best week in 2019 as the major benchmarks rallied for the fourth straight day on Friday (not captured in above chart)
• The Labor Department released a disappointing May jobs report (75k new jobs added vs. 185k consensus). Employment gains for April and March were also revised down by a combined 75k
• The weaker jobs data, coupled with the expectation that the current multi-front trade fracas the US is engaged in will hurt the economy, appears to have motivated investors to buy stocks as the odds of a Fed rate cut in the near term have increased
• The Fed fund futures market now augurs a 72% chance of a rate cut at the July 31st meeting, and a 23% probability of a rate cut in the June 19th meeting

Here's an update on how some key factors (and US Total Risk) have changed in the US model over the past week, using our normalized return indicator:

• We discuss Momentum and Growth in more detail below...
• After being in virtual free-fall over the past 6-7 weeks, Size bounced back from trough and was this week's biggest winner, gapping up +0.27 standard deviations
• Profitability also seems to be recovering from a recent bottom of 0.19 SD above the mean on 6/3
• Volatility and Market Sensitivity saw continued weakness, as they both trended towards Extremely Oversold territory
• Earnings Yield was the biggest loser of this group, dropping closer towards the Oversold threshold of -1 SD
• US total risk (using the Russell 3000 as proxy) saw an increase of 0.27% and trended back towards 14%

‍Medium-Term Momentum

‍This factor has enjoyed a fairly steep positive return trajectory on both a cumulative and normalized basis. In fact, if we look at Momentum's historical performance, we can see that it currently sits +0.57 standard deviations higher than its previous peak over the past 12 months (+2.14 SD above the mean on 12/31/18).

Momentum was at a neutral +0.34 SD above the mean on 5/6/19, and has shot up 2.37 SD's in the past month. As the factor approaches almost 3 full standard deviations above the mean, it's important to note that in the past it has tended to sell off around the +2 standard deviation mark, suggesting that a potential reversion towards the mean could occur in the near future.

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

Growth

‍After hitting a recent nadir of -1.14 SD below the mean on 3/28/19, Growth saw a substantial rally on both a cumulative and normalized basis.

It appears to have hit a normalized peak of +1.09 SD above the mean on 5/31/19 (when it was labeled as Overbought in our framework), and has already started reverting back towards the mean.

Growth factor is a blend of sales growth, estimated sales growth, earnings growth, and estimated earnings growth.

We haven't seen a simultaneous rally to this extent in these two factors in quite a while, and the implications of a reversion in both of them may be wide-ranging. This is doubly true for tech portfolios that have significant exposure to both Growth and Momentum. In fact, IGV (the iShares Tech Software ETF) is the most correlated ETF across both Growth & Momentum, which for most factors is an atypical sector concentration.

Using our Security Search tool, we're able to quickly identify the names that have the highest exposure to Growth and Momentum within a certain universe. Here, we used the Russell 1000 to find the top 10 companies in terms of exposure to each factor.

We'll keep an eye on these factors and provide an update next week on how they're trending.

Regards,
Omer