Tech Rallies While Broad Market Calms

Market Summary

US Market: 8/18/2023 - 8/24/2023

• Broad market indices finished relatively flat over the five trading days ending August 24th but sectors showed quite a bit of dispersion. The S&P closed up 0.1% while the Nasdaq rallied 1.1%. The Dow struggled this week, finishing at -1.1%
• Fed Chairman Jerome Powell urged continued vigilance in fighting inflation which “remains too high” at the Economic Symposium in Jackson Hole on Friday. The market initially reacted negatively to the news of potential continued rate hikes but turned positive in the afternoon trading session.
• Nvidia posted a strong beat on its hotly-anticipated Q3 earnings report. Their $13.1B revenue figure marked 101% growth year-over-year and 88% growth over the prior quarter. GAAP EPS grew 854% year-over-year and 202% since last quarter. The stock price rose more than 8% after hours on Wednesday.

Extreme Movers Portfolio Performance

Note: Extreme Movers definitions can be found in Factor University on our website.

US Extreme Movers Volatility and Factor-Driven Speedometers

• Overall market volatility subsided from “Volatile” territory for the first time since early July. The 13.2% return in the US Extreme Movers portfolio falls in the third quintile since inception, earning this week a “Neutral” rating.
• Factor contribution ticked up very slightly this week but US markets remained “Alpha-Driven”. The 20.9% contribution from factors fell in the 39th percentile since inception.

International Extreme Movers Volatility and Factor-Driven Speedometers

• Volatility levels were also neutral in ex-US markets as the International Extreme Movers portfolio returned 14.2% this week coming off the heels of a “Calm” period over the prior week.
• The International portfolio also pointed to increased factor influence across stock movements as the 29.6% factor contribution ranks in the 62nd percentile since inception.

US Extreme Movers Portfolio Exposures

• The dominance of Information Technology persisted this week, surpassing last week to a significant extent. Its 39% long allocation classifies it as one of the most substantial allocations since its inception, ranking at the 99th percentile ITD. Notably, Software constituted 16% of this allocation, followed by Semiconductors and Semiconductor Equipment at 12%.
• Real Estate’s 6% allocation landed in the top quintile both on a TTM and ITD basis. The allocation was equally contributed to by Specialized REITs, Industrial REITs, and Office REITs, each accounting for 2%.
• Consumer Discretionary, Consumer Staples, and Communication Services exhibited significant short allocations, primarily driven by Specialty Retail, Food Products, and Entertainment, respectively. As a result, these three sectors are positioned in the bottom decile ITD.

• Beta factor exposure was positive this week, primarily influenced by the long book. Volatility factor exposures varied between models, generally leaning towards a negative exposure driven by the short book.
• The portfolio continued to exhibit a clear tilt towards Growth, as growth factors landed in the top decile TTM, driven by the long book. Concurrently, the long book was also the primary driver of the negative exposure to Value. This indicates that investors favored stocks demonstrating growth-like characteristics and counteracted value-oriented investments.
• HF Crowding saw one of the largest positive allocations ITD, landing in the top decile. Conversely, Short Interest landed in the bottom decile ITD. The HF Crowding exposure came from the long book, while the Short Interest exposure came from the short book, implying that investors favored popular longs and bet against popular shorts.

International Extreme Movers Portfolio Exposures

• The sector allocations of the international portfolio landed much closer to the mean than those of the US portfolio, as all sector allocations landed within the middle three quintiles on a TTM basis.
• Materials led the week with a 5% allocation. This allocation consisted of a 10% position in Metals & Mining, counterbalanced by a 6% short allocation to Chemicals.
• Utilities had the largest allocation relative to its historical mean, at the top quartile both on a TTM and YTD basis. The position in the sector was explained mostly by Electric Utilities, holding a 4% share in the portfolio.
• Pharmaceuticals drove the short allocation in the Health Care sector, whereas Health Care Equipment & Supplies stood as the sole industry within the sector with a positive allocation.

• In this week's international portfolio, both Beta and Volatility factors displayed a negative exposure, driven solely by the short positions. This signifies that investors were placing bets against high-beta, high-volatility assets within the global markets.
• Interest Rate Beta witnessed a significant positive allocation, positioning itself within the top decile TTM and in the top quintile ITD. Both longs and shorts contributed equally to this positive exposure, indicating that investors showed a preference for stocks with a positive relationship to increasing interest rates and simultaneously bet against stocks with a negative relationship with rising rates.
• Exposure to Growth closely aligned with their historical mean, whereas exposures to Value and Quality exhibited a mixed behavior across their respective factors.

International Extreme Movers Portfolio Country Exposures

The chart presents the portfolio's exposures to various groups in the Developed and Emerging Markets, highlighting the three most notable country contributors for each respective group's allocation.

• Developed Markets continued to hold a prominent position in the long book, securing the top tercile ITD. In contrast, Emerging Markets led in the short positions, occupying the bottom quartile for both TTM and ITD.
• Asia-Pacific regions were particularly prominent this week. While Japan achieved its most significant long allocation in the TTM period, at 24%, China had its most negative allocation in TTM and one of the lowest allocations ITD, notably carrying a -45% weight in the portfolio. China by itself accounts for most of the negative allocation within Emerging Markets.
• Other notable geographies within Emerging Markets include Brazil and South Africa, each with long positions representing 10% and 7%, respectively.

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