Overbought/Oversold Factors Around the World

We’ve spent the past couple of weeks focusing on Momentum and Growth (both of which are continuing to revert to the mean on a normalized basis). Today, we’re going to pull back the lens and examine factor trends in our US and Worldwide models, in order to identify some other themes that are playing out right now.

First, let’s take a look at the past week's market and factor action:

US Market (6/14/19 - 6/20/19)

• Dovish commentary by Fed Chairman Jerome Powell on Wednesday created a tailwind for the market, with the S&P 500 hitting a record intraday high Friday, before closing slightly down (not captured in above chart). The three major indices were up for the third week in a row.
• The Fed came out of Wednesday’s meeting leaving rates on hold, in a range between 2.25 and 2.5%.
• Friday’s announcement that the US administration was minutes away from a military strike on Iran raised investor unease but had little impact on the market, while news that VP Pence was deferring a speech on Chinese policy lent confidence to investors anticipating a positive result from upcoming trade talks between US and China.
• Oil futures were up on Friday, with US prices up ~9% for the week, due to concerns over Middle East tensions and expectation of central bank moves in the near-term.

Here's an update on how some key factors (and US Total Risk) have changed in the US model over the past week, using our normalized return indicator:

• Market Sensitivity and Volatility were the week’s biggest winners. They appeared to track each other pretty closely as they had big positive moves and shed their Oversold designation - now both sitting at -0.67 SD below the mean.
• Earnings Yield saw a slight decline as it descended further into Oversold territory.
• Size continued to rally back into neutral space after a recent bottom of -1.76 SD below the mean on 6/3/19.
• The downward slide in Growth slowed down as it continued to fall back towards the mean
• Meanwhile, Momentum was the week’s biggest loser as it continued to fall from the rarified heights it had reached over the past month
• US total risk (using the Russell 3000 as proxy) ticked up slightly from 13.87% on 6/14, to 13.89% today.

Overbought/Oversold Factors in the US and Abroad

‍As we continue to follow the reversion pattern that Growth and Momentum have exhibited in the US over the past two weeks, we wanted to expand the field of factors we observe to include all currently overbought and oversold factors in the US and Worldwide models.

Momentum - US

‍We’ve discussed this factor at length over the past two weeks, but it bears repeating that the factor had reached its second highest peak ever modeled on 6/10/19 (+2.79 SD above the mean). The factor is continuing to revert towards the mean, and if it echoes past behavior, will continue to fall sharply into Oversold territory before reversing the trend.

‍Medium-Term Momentum - 6/20/18 - 6/20/19

Dividend Yield - US

‍Another “Extremely Overbought” factor, Dividend Yield currently sits +2.28 standard deviations above the mean. This factor has seen a meteoric rise since bottoming out at -2.16 SD below the mean on 3/21/19. The current macro backdrop and easing signals from central banks have led to significant declines in bond-market yields, supporting yield equities generally and in particularly yield-oriented names.

Profitability - US

‍This factor recently entered Overbought territory, after being nearly 3 SD below the mean at the end of 2018. It appears that even in a record-setting market, investors have been targeting quality stocks with strong return-on-equity, return-on-assets, cash-flow-to-assets, cash-flow-to-income, gross margin, and sales-to-assets.

Leverage - US

‍This factor, which measures company exposure to debt levels via a blend of debt-to-assets and debt-to-equity, hit a peak on 2/5/19 at +1.99 SD above the mean (just shy of an Extremely Overbought designation). It then hovered around neutral territory, and has since sold off to -1.82 SD below the mean. This factor has been progressively become more correlated with the Oil & Gas sector (ETF: XOP) over the past 3 months, which potentially suggests, possibly due to heightened geopolitical risk, that highly levered Oil & Gas companies are near-term targets for sellers.

Value - US

‍Value has been out of favor for the past couple of years, although on a normalized basis has seen some pretty extreme movement since peaking at +1.91 SD above the mean on 1/30/19. After climbing to similar heights of +1.78 SD above the mean on 5/15/19, the factor has seen a steep selloff and is continuing to travel deeper into Oversold territory.

Earnings Yield - US

‍Another dimension used to denote relative value, Earnings Yield has seen weakness on a normalized basis and is seen as Oversold in our framework. It does appear that the curve of the downward trend appears to be flattening, so we might expect to see a reversion in this factor sometime in the near future.

Momentum - Worldwide

‍Just like we’ve observed in the US model, Medium-Term Momentum saw a substantial rally on a normalized basis, peaking at +2.77 SD above the mean on 6/7/19. As global momentum is strongly weighted to the US version of the factor, it is not surprising that it’s already starting to revert towards the mean, but at +2.16 SD above, it still has a generous amount of room to run back down and remains Extremely Overbought.

Growth - Worldwide

‍Global Growth followed a similar trajectory to that of its US counterpart, but actually saw even more strength relative to historical trend over the past month. The factor hit an apex of +1.9 SD above the mean on 5/31/19 and has since started to revert, now sitting at +1.24 SD above the mean.

Market Sensitivity - Worldwide

‍In another chart that tracks its US counterpart very closely, global Beta hit a high point of +3.26 SD above the mean on 4/4/19 and had since experienced a fairly steep reversion, bottoming out at -1.67 SD below the mean on 6/3/19. The factor has started to bounce back towards the mean, but remains in Oversold territory today, indicating that lower beta stocks continue to be favored. Relative valuations of low vs. high beta stocks indicate, however, that rotation risk is notable.

Value - Worldwide

‍Global Value has followed the same trend as its US counterpart, with some recent strength in May turning into a sell-off relative to historical trend in June. The factor appears to have reached a nadir of -1.22 SD below the mean on 6/18/19, and the trendline is pointed back up for now. We can expect to see a near-term reversion in Value names in both the US and Worldwide models.

We’ll continue to monitor these factor trends as well as other themes worth tracking. If you’d like to better understand your portfolio’s relationship to these (or any other) factors, or have questions about our normalized return framework that produces these Overbought/Oversold designations, please don’t hesitate to reach out.
Regards,
Omer