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Smart Beta Book – Feb 10, 2020 QMIT by QuantZ

By:

CEO, QMIT – QuantZ Machine Intelligence Technologies

Part I of Feb 10, 2020 will recap January 2020.

Stay tuned for Part II of Feb 10, 2020 commentary, which will focus on The Sector ranks table and heatmaps with the DTD, MTD, YTD, 5 year, Post-07 & LTD returns for our ESBs.

  • Following the explosive factor moves in Jan 2020 (which were really a continuation of 2019 thematically), the first week of Feb 2020 was rather different due to a combination of earnings and the CoronaVirus scare.
  • Despite the market ending substantially higher for the week at +3.2% on the SPY, there was a huge rotation beneath the surface. We witnessed a major Val-Mo rotation on Feb 5th with Value & Reversals up as much as +4% driven by the bounce in Energy vs PMOM & Risk down ~-2% ($ neutral) as the growthy tech names sold off. It remains to be seen whether there is a catalyst for a sustained move as it fizzled out Thursday/ Friday especially in light of the payroll number. By the end of the week after the reversal faded we only saw ~+2% for DV (Deep Value) & Reversals and ~+1% Analyst Ratings (ART) & CSU with -1.4% for Enhanced Momentum ($ neutral).
  • Key catalyst for Value remains the steepness of the curve for financials & cyclicals to ignite which will depend on overall confidence in economic growth & sentiment regarding the economy.
  • We wanted to dive a bit deeper into our rationale behind a potential Value-Momentum rotation. Value has performed extraordinarily well vs Momentum over the past 2 decades particularly given the benefit of starting near the beginning of the NASDAQ crash in 2000. However, the dramatic underperformance over the past 5 years is similar to that of the late 90s dot com era & it has substantially narrowed the outperformance gap.
  • From the annual returns chart below we can see that our Momentum composite has held up rather well post-Global Financial Crisis except for the 2009 inflection point which did severe damage to the short side of Momentum & the 2016 Citadel Voyager inspired Momentum crowding unwind.
  • The underperformance over the last 3 years has resulted in Value factor becoming “cheaper” (meaning the valuation dispersion between its longs vs shorts has become much more extreme) because many of the growthy shorts continue to get bid up (which would also suggest that’s where much of the spread reversal may come from as opposed to the long side). Looking at the z-score of 1-year spread returns [for Value– Momentum] at ~-1.5 in the chart below and the 3-year spread z-score of at
  • Key catalyst for Value remains the steepness of the curve for financials & cyclicals to ignite – that remains to be seen as the move clearly fizzled out fast.
  • Stay tuned for more on the historically extreme valuation dispersion spread we speak of above – we will be formalizing our “Factor on Factor” research framework which looks at the valuation, momentum etc attributes of factors themselves from a timing standpoint.

For 2019 recaps, see 2019 Composite Signal Monitor Performance Recap – QMIT by QuantZ and 2019 Factor Recap – QMIT by QuantZ.

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