October 2016 Mid-Month Factor Returns

Please find below a summary of the Factor Returns for this week, MTD, QTD and YTD with some commentary.

Key Comments:

• The Beta stock factor was buoyed by falling markets to recover some of its dismal performance over the past year.
• The strongest performing factor, the 4 WK TR Reversal factor, has done well again this week. In these falling markets, the stocks that have done well recently have reversed their gains. One example of a high profile reversal is that of Twitter (TWTR). The stock spiked in September on hopes that another tech company would be crazy enough to buy them. After the hopes were dashed, the stock sits lower than it was when the acquisition rumors picked up.
• Astute readers might note that a new factor was added to the table - Short Interest. The amount of outstanding short interest is a data point that is tracked and is widely available, albeit at a lag of over a week. We calculate short interest by dividing the shares borrowed by the amount of float outstanding.
• It turns out that the people whose business it is to find stocks to short are quite good at their mandate. On average, stocks with high short interest underperform those stocks that no one has any good reason to short, so the polarity of this factor is Low-High.
• Another unique aspect of this factor is its correlation with the general market. Below is a chart of the S&P 500.

• Throughout 2016, the correlation between the daily returns of our short interest factor and that of the S&P 500 has been -0.63. This can be explained in part through a classic saying from the Sage of Omaha, you only find out who is swimming naked when the tide goes out.

Regards,
Omer