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From Our Blog

Volatility & Beta Up Big While Profitability Slowly Recovers

Jan 13, 2019 9:00:00 AM

This week brought with it some mixed news, between the potential jobs impact stemming from the government shutdown, increased optimism over US-China trade, and recent comments from the Fed about the need for “patience”. With regard to factors, we're seeing signals that indicate that we're in the midst of a return to a “risk-on” environment, with Volatility and Market Sensitivity both getting bid up. At the same time, Profitability (Quality) continues to slowly recover. Let's dig in.

US Market

The US Market factor (99% correlated to the S&P 500) saw a substantial rebound, up 6.53% since last Friday. The combination of Friday's strong jobs print, trade optimism, and a positive forecast out of GM had investors buying up stocks after the recent bout of pain in the market.

 

Factor Update

Here's an update on how some key factors have changed in our normalized return indicator over the past week.

 
In our Nov 4 Factor Spotlight - Short Squeeze or Sustainable Rebound?, we discussed the relationship between the market and the Profitability, Volatility, and Market Sensitivity factors. We posited that based on the historical interplay between the factors, we would want to see a rally in all three factors before crowning any factor rally a true rebound versus short covering. As you can see, Market Sensitivity and Volatility both saw a substantial rally over the past few days. Profitability saw a recovery, but at a much slower clip.

Volatility

This factor was the highest performing factor over the past week, up 1.15% and a whopping +1.44 standard deviations on a normalized basis since Jan 4. A rally of that magnitude in Volatility serves as a strong signal that investors have been eager to add more risk to their portfolios. 
Market Sensitivity

Similar to Volatility, Beta enjoyed a major recovery - up 2.47% in absolute terms and +1.13 standard deviations on a normalized basis. This suggests that investors were happy to put money into names that move in step with the market, another indication that many were looking at recent market turmoil in their rearview mirror.
 
Profitability

Lastly, we saw positive movement for Profitability (one of the pillars of “Quality), but not to the same extent as the other two factors that we've tracked here.
In the above-mentioned article, we explored how historical recoveries were punctuated by huge rallies in all three of these factors. Profitability has drifted upwards, but nowhere close to the “vertical line” that we've seen in Volatility and Market Sensitivity. As a result, we can say that we may be in early innings of a true market rally, but we'd like to see real money come back into Profitability before we're able to make that claim. We may be heading in that direction, and will keep you apprised on these factors as the story develops.

As always, if you'd like to see what your portfolio's relationship is with any of these factors, or would like to better understand how you can mitigate factor exposure, please don't hesitate to reach out.
 
Regards,
Omer

Read More

Factors Have Rallied Amid Macro Uncertainty

Jan 6, 2019 12:36:27 PM

I hope you enjoyed the holidays and year-end festivities. Today, we'll provide a factor update spanning the past two weeks, a period characterized by sustained choppiness in the market and mixed economic headlines. Just this week, AAPL dramatically lowered 1Q revenue guidance, citing “economic deceleration,” particularly in China. and the ISM Manufacturing Index's significant December put a large dent in investor sentiment. Friday saw a strong December jobs report and comforting words out of the Fed, allaying investor's fears and sparking the second major market rally in just as many weeks.


While we primarily cover factors here, it's vital to understand what the fundamentals of the environment are showing, and the news has been somewhat schizophrenic on that front as of late. One thing is certain: the word “recession” is being thrown around much more these days, and investors are preparing themselves for a market that looks more like 4Q2018 than the constant drift upwards we had seen previously. 

US Market

The US Market factor (99% correlated to the S&P 500) saw continued weakness after falling nearly 7% the previous week. The slump in the days before Christmas were answered by a brief rally, then came the AAPL and ISM news. Friday hasn't been captured in the model yet, but the S&P 500 shot up 3.43% on the positive macro datapoints at the end of the week. 

Factor Recap

Here's a look at how some key factors we've been tracking have changed in our normalized return indicator. While the macro and earnings picture might be muddied, most factors actually staged a major rally on a normalized basis:
 
The bulk of this factor lift occurred from Dec 26 - Jan 2, and the biggest movers over the past two weeks were Profitability and Volatility - two factors that we've been closely tracking since October's market swoon.

Profitability

As we've discussed since the very beginning of December, Profitability was Extremely Oversold on a normalized basis, bottoming out at -2.89 standard deviations below the historical mean on Dec 17th. Since then, the factor has seen a substantial rally, up 1.13 standard deviations since Dec 20. The upward reversion appears to be continuing, as the factor is still in Oversold territory. This move may reflect a flight to quality as the recent market volatility has spurred investors into seeking risk-off assets.

On a cumulative basis, the factor was up 0.19% since Dec 20, as of EOD Thursday.

Volatility

The second biggest beneficiary of the post-Dec 26 factor rally, Volatility ended up +0.72% on a cumulative basis since Dec 20, even after Thursday's negative datapoints chipped away at the gains.

On a normalized basis, the factor went from -0.26 SD below the mean on Dec 20, to +0.33 SD above the mean as of the Jan 3 close.

 

 

While the recent positive moves in Volatility may have a palliative effect on some investors' risk appetites, we continue to see the wisdom in managing risk from Volatility in today's environment. As our friend Melissa Brown lays out in the Axioma blog, minimum variance strategies have played out well during the recent market downturn.

We'll continue to monitor these factors and will be back next week with an update to see what other trends we can divine from the intersection of factor movements and the economic news that the markets will continue to act on. If you'd like to see what your portfolio's relationship is with any of these factors, or would like to better understand how you can mitigate factor exposure, please don't hesitate to reach out.

Regards,
Omer 

Read More

Factor Spotlight: EOY 2018

Dec 23, 2018 9:00:00 AM

With the next issue to be published in January, the entire Omega Point team and I would also like to take this opportunity to wish you a peaceful holiday season and New Year filled with happiness and prosperity.

As noted last week, you can now access all past issues of Factor Spotlight on our website, and in this issue we have compiled a list of the top 5 most popular Factor Spotlights of 2018. (#1 should come as no surprise to most of you.) 

US Market 

This has been one of the toughest weeks we've seen for the US Market Factor (99% correlation to the S&P 500), dropping almost -7%.

Factor Recap

Here's a look at how some key factors we've been tracking have changed in our normalized return indicator. This week's biggest movers have been Growth and Medium-Term Momentum moving into Overbought territory and Market Sensitivity reverting away from the mean.

If you'd like to see what your portfolio's relationship is with any of these factors, or would like to better understand how you can mitigate factor exposure, please don't hesitate to reach out. 


Now without any further ado, below are the Top 5 Most Popular Factor Spotlights of 2018.

1. FACTORMAGGEDON 2018? 
October 12
Taking a break from our usual focus on a specific factor this week, we'll be sharing our observations on the recent market sell-off from a factor point-of-view. The Nasdaq and Dow are off to their worst start to a fourth-quarter since 2008, and we’re seeing one of the steepest market declines in recent memory. While many pundits are blaming rising interest rates, industrial weakness, and looming trade conflicts, our models show that we can empirically assign a lot of the market's underperformance to an intensifying factor rotation across the well-known 6 style factors. MORE

2. HOW TO GET DEFENSIVE WITH YOUR PORTFOLIO
October 24, 2018
Last week, we discussed how much the market's recent drawdown was driven by a factor rotation away from the cyclical factors (Volatility, Market Sensitivity, & Momentum) and into the more defensive factors of Size, Value, & Profitability. Though we've seen a market bounceback in the past week, movements continue to be heavily correlated with the factor rotation, as shown below. MORE

3. CHARACTERISTICS OF THE RECENT SELLOFF
October 28, 2018
Over the past couple of weeks, we've discussed the factor rotation we observed during the initial market selloff, and how you can create a defensive basket of ETFs to maximize exposure to the defensive factors (Value, Profitability) and minimize exposure to the cyclical factors (Volatility, Market Sensitivity). MORE

4. FACTOR SPOTLIGHT: MOMENTUM UPDATE
September 7, 2018
I hope you've been having a great summer. While factor movement has been relatively quiet this season, we're now seeing the emergence of signal for Medium-Term Momentum factor in both the US and Global models. Usually, when we see this type of movement in both models, it makes for a much stronger signal. MORE

5. SIZE FACTOR IS EXTREMELY OVERSOLD
March 23, 2018
Continuing with our Factor Spotlight series, I wanted to highlight Size as another factor currently sending a strong signal in our Factor Profile. MORE

 


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Profitability is closer to an inflection point

Dec 16, 2018 7:00:00 AM

I hope all is well as we head into year-end and the holiday season. Before we dive in this week, I’m thrilled to announce that you can now view current and past issues of Factor Spotlight directly on this blog. You can also filter articles based on keywords to more quickly find specific topics you would like to explore further.

Read More

Profitability nearing a Bottom

Dec 9, 2018 7:00:00 AM

After a tumultuous four-day trading week, we wanted to quickly check in on some factors that we've been tracking, and then examine why Profitability is being flagged as “Extremely Oversold,” and compare the current period to previous times of weakness for that factor.

Read More

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