![]() And while a regime shift may not be in the cards just yet, investors should be ready for more ups and downs in momentum stocks as some of the imbalances in their makeup begin to normalize in the weeks ahead. ![]() Six-month price change exposure of sectors in the top 1200 securities in the United States by market capitalization.Īll in, then, it seems that momentum volatility is being amplified by both underlying factor and sector exposures that have turned extreme relative to history. Source: AGFiQ using data from FactSet as of June 30, 2022. ![]() On the flip side, our research also shows exposure to information technology and consumer discretionary is close to 20-year lows. This includes more exposure to energy than ever before and historically high exposure to defensive sectors like consumer staples and utilities. momentum stocks right now (Illustration 3). Factor exposure of the stocks with the best six-month price change (quintiles) in the top 1200 securities in the United States by market capitalization.Ī similar pattern of extremes is also evident when analyzing the sector makeup of U.S. Of course, this makes sense given the recent performance, especially in value, which has recovered in the past 15 months all the cumulative gains it unwound in the three years before that. stocks with the best six-month momentum than it is now, while beta exposure has never been less (Illustration 2). Our research shows that value exposure has never been higher in U.S. One- week rolling return spread between the highest and lowest stocks based on six-month price change (quintiles) within sectors in the top 1200 securities in the United States by market capitalization.Įither way, it’s also interesting to note the underlying characteristics of momentum stocks today and whether that might be what’s causing them to be more volatile than usual. ![]() Momentum Drawdowns: Regime Shift or Rebalancing? Even though momentum drawdowns have been large of late, there hasn’t been a clear-cut regime-shifting event to explain them -at least not to date. In fact, that seems to be what investors have been experiencing over the past weeks. In this case, larger-than-normal drawdowns in momentum stocks can happen at the end of a month or quarter simply because investors have decided to lock in outsized gains that preceded the drawdowns as part of a regular rebalancing. Still, the relationship between significant drawdowns and regimes shifts doesn’t always hold, including when momentum volatility is particularly high. One of the best examples of this was in the fall of 2020 when value stocks went from laggards of growth stocks to leaders of them following the approval of the first COVID-19 vaccine in the United States. Also important is the notion that big moves in momentum stocks often reflect shifting dynamics in equity markets more broadly and can sometimes be a signal of imminent changes in the direction of them.įor instance, significant drawdowns in momentum stocks can sometimes coincide with regime shifts that result in certain underperforming factors and/or sectors of the market turning into outperformers and vice versa. stocks with the greatest momentum over a six-month period – versus those with the least – have been oscillating from positive to negative in a way that is reminiscent of the early part of the pandemic in 2020, albeit not quite so extreme (Illustration 1).īut its not just those with direct exposure to this kind of volatility that should be taking notice. Case in point, our research shows that rolling one-week return spreads for U.S. Momentum is a hot topic with factor investors these days, mainly because of the volatility that has been associated with it in recent weeks. Today’s focus is momentum volatility and what it may or may not be signalling investors. Every month (or so), AGFiQ highlights the investment factors that are helping shape equity markets.
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