Something for your Espresso: The momentum factor holds the keys
Morning from Europe!
The massive rotation over the past week has been a real head-scratcher for us and others. Even though there have been attempts to explain the rotation by a fundamental shift in the outlook due to a rising probability of a red sweep in the November election, we remain unconvinced as the macro fundamentals still point in the other direction.
We experienced another crazy day in the markets yesterday with material sell-offs in high beta assets such as Technology, due to:
- ASML fears stemming from a Chinese-heavy order book
- The Trump/Vance bid not proving to be Silicon Valley friendly
- Momentum break-downs likely leading to CTAs exiting
How do we get back to momentum being in fashion? Nothing is more vulnerable to a momentum break-down than Semis & Nasdaq (see chart 1b).
Chart 1a: A historical spread between Small Caps and Nasdaq over the past week
Chart 1b: Rolling 3m beta to the “momentum factor” in various equity classes
The market is really turning against momentum strategies, which is a self-feeding loop until challenged by an exogenous input. There is nothing fundamentally sound around the rotation yet.
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