Momentum factors, including both EPS and Price Momentum, have surged since last September, with Price Mo accelerating this year (HERE) until the past few weeks. Price Mo has struggled as winners in AI and Semis have pulled back, leaving a -17.4% drawdown for the unconstrained Price Mo basket. In contrast, EPS Momentum remains resilient and slipped just -1.8% from its peak.
Historically, 1, 3, and 6 month forward returns to Price Mo are weaker than usual, regardless of recessionary or non-recessionary periods, following similar declines. However, S&P forward return over the same forward periods tend to be better than normal. The exception is over 1) short periods 2) during recessions. The bottom line is Price Mo weakness tends to signal further weakness in Price Mo only.
Although the recent correction has reduced some of the excesses in Price Momentum, volatility of the factor remains well above its long-term median at the 97th and 93rd percentiles for rolling 1 month and 6 months readings. That high volatility reflects the divergent views about Price Momentum.
Relative to Price Momentum, the volatility for EPS Momentum is much lower on an absolute basis and relative to its long-term median, leaving less risk to the factor. Our tradable Swap MS22EVPM Index which long S&P 1500 top decile EPS Momentum and short Momentum of Price has gained 5.4% YTD and we expected further gains if Momentum factors continue to follow their historical patterns. We list S&P 1500 top decile EPS Momentum of Price names at the end of this report.
Price Momentum Drawdown & EPS Momentum Relative Tailwind: Both EPS Momentum and Price Momentum have strengthened significantly since September, reflecting a broad improvement in both earnings revisions and market sentiment. However, the two factors have diverged over the past month. Price Momentum has experienced a sharp pullback over the past two weeks as profit-taking and increased market volatility weighed on recent AI and Semis winners. In contrast, EPS Momentum has remained resilient, slipping just –1.8% from its peak.
Though Price Mo returns have shown skewness historically, which could see sharp plunge in a short-term, the recently pullback for unconstrained basket remains to be a 92%th percentile move, and rarely happens outside Recessions.
For historical Price Mo drawdowns similar as today, the median forward return for the factor has been weaker than usual and turned negative on forward 1 month, 3 months and 6 months basis, even during non-recessionary periods.
That continued weakness tends to be isolated to Price Mo. The median forward return for the S&P following periods of Price Mo drawdowns tends to be stronger than for all periods, especially over the short term during non-recession periods, which is more comparable to today.
The risks to Price Mo have increased as factor volatility has reached extreme levels. The current Price Mo volatility is at its historical 97th and 93rd percentiles using a 1mo and 3mo measurement period. That has not happened outside of a recession since 2005. Although the recent correction has reduced some of the excesses in Momentum of Price, volatility remains well above its long-term median, suggesting return dispersion within the factor is still high.
Currently, Price Mo volatility is only behind Low Volatility in terms of absolute readings, and is the largest in terms of spreads to its typical vol. By comparison, EPS Momentum volatility remains one of the lowest measured both absolutely and relative to its long-term median.
In line with factor returns post sharp drawdowns, Price Momentum median forward returns post sharp vol spikes has also been weaker than usual and performed negatively.
The S&P median forward returns 1 month after Price Momentum vol spikes have been better than all periods as well, both for recessionary and non-recessionary regimes.
We have a tradable Swap (ticker: MS22EVPM Index), which long S&P 1500 top decile EPS Momentum and short Momentum of Price basket. The LS Swap gained 5.4% last week on Momentum of Price slump, and is expected to climb further if Momentum of Price volatility stays.
Below we list S&P 1500 names falling in top decile EPS Momentum basket, the group has a relative better outlook than Momentum of Price names.
