Factor Spotlight
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Happy Friday. This week we're going to discuss how Profitability (a component of Quality) is Oversold in both our US and Global models, and provide an update on Medium-Term Momentum (which we had flagged as Overbought last week).


If you recall our Factor Spotlight note on 4/26/18, we introduced Profitability as a key proxy for Quality. Profitability is a combination of return-on-equity, return-on-assets, cash flow to assets, cash flow to income, gross margin, and sales-to-assets. Overall, the long-term risk premia for Profitability has been strongly positive.


Recently, however, we're observing a decoupling from the long-term trend.

US Model

In the US, normalized return for Profitability has fallen to Sep 13th's -1.63 SD below the historical mean. There currently appears to be a flattening of the curve, as we see the factor has rallied in the past week on a cumulative basis.


Global Model

Profitability has sold off even more on a worldwide basis, currently sitting at -1.74 SD below the mean, very gradually rising from a Sep 4th trough of -1.83 SD below the mean.


Usually, when we see this type of movement in both models, it makes for a much stronger signal.

Momentum Update

Last week, we highlighted Medium-Term Momentum as an Overbought factor in both of the US and Global models. Since then, the rally has seemingly continued without any brakes:

US Model

Currently sitting at 1.83 SD above the mean, Momentum is heading towards "Extremely Overbought" territory in the US.


Global Model

Around the world, the run-up is even more pronounced, currently +2.24 SD above the mean on a normalized basis.  


If you'd like to see what Profitability, Momentum, or any other factors look like in your portfolio's performance and risk profile, or would like to better understand how we measure the relationships between factors, please don't hesitate to reach out.


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