Momentum

A “moderate-risk” S&P 500 VLT BUY signal was triggered at the end of August, but it’s not all good news. Any upturn in the VLT while the indicator is in positive territory also sets up a pattern known to veteran market analysts as the “Killer Wave.”

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While Momentum continues to work overall, the gains have been skewed to the companies trading at the highest valuation multiples. Extremes, based on both price and valuation, have only been greater a handful of times during the period measured.

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The makeup of Momentum has stayed surprisingly steady through the volatility in 2018, with Info Tech and Health Care maintaining overexposure. Energy is sneaking in, though, and could be poised to take a much larger share.

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For at least the last year we have argued that late bull market conditions would tend to reward momentum strategies over mean-reverting ones. That’s played out not only during the market’s melt-up phase, but also (to our surprise) during the recent two-week air-pocket, at a time when we would have expected to see at least a temporary setback in the ratio above.

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Historically, leadership and breadth accompanying an upside market move is far more predictive than the pure momentum of the move. But when intermediate-term momentum is not just strong but exceptional (as it was until just recently), there has usually been even more upside to follow.

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If stock market breadth and leadership look nothing like they typically do at cyclical peaks, neither does momentum.

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For sector overweight/underweight decisions, applying a Momentum overweight with both EM and DM countries has been most successful.

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Momentum is one of the most widely accepted alpha-generating factors, used by quantitative and fundamental managers alike. Its biggest drawback, however, is high turnover. Herein we explore momentum from the perspective of sector weights.

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Market history teaches us that investors behave differently in groups than they do as individuals.

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Sometimes we feel compelled to report findings that conflict with our outlook. And then there are the even rarer times we actually do it.

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We remain bullish on stocks but with very limited visibility into 2018.

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Swings in the stock market and economic momentum are not always synchronized, and the largest price adjustments in either direction tend to occur when they are not.

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Last month we assessed the effectiveness of using valuation factors as a basis for country allocation. Using 20 years of data, our results showed that they work quite well specifically for Emerging Market (EM) country-rotation, however, the same valuation-based strategy does not appear to be value-added for Developed Market (DM) allocation/rotation.

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Last year’s “low-risk” BUY signals from our Very Long Term (VLT) Momentum algorithm have proven very profitable, but enough time has elapsed that they should no longer be considered an important bullish factor.

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After laying an egg in 2016, momentum-based stock selection strategies have acquitted themselves better through the year’s first half.

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Two years ago, we played the role of the bull market’s mortician, preparing it for burial after a six-year run that had taken it to valuations on par with those at the 2007 top.

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After a two-month lull, stock market momentum reasserted itself in May bringing our summer S&P 500 target of 2,600 back into focus… Meanwhile, we’ve fielded several media calls about the “FANG” stocks’ large contribution to some YTD returns—but that doesn’t diminish the new highs being made elsewhere by disparate groups… NYSE Weekly A/D Line and New Highs/Lows figures also suggest the stock market isn’t yet top-heavy enough to tip over.

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The S&P 500 has labored beneath its March 1st bull market high for the last two months while underlying breadth and leadership trends have remained mostly favorable.

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Momentum factors are effective in differentiating EM sector performance, with High Momentum significantly outperforming Low Momentum. Unfortunately, there is a lack of investable EM sector vehicles.

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The sell-off into last February’s low did not qualify as a bear market, but subsequent action—including the mayhem in “factor-land”—certainly suggests it was a very significant “psychological” low.

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