Factor Spotlight
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Profitability is Closer to an Inflection Point

I hope all is well as we head into year-end and the holiday season.

After last Friday's move down, the US Market factor (99% correlation to the S&P 500) mostly traded sideways over the course of the week.


Here's a look at how some key factors have changed in our normalized return indicator. As you can see, there were some strong rebounds for Growth and Momentum, with each factor moving up almost one full standard deviation in normalized return. We also saw Earnings Yield, which had been flagged as Overbought, losing some steam and reverting to Neutral territory.



On a cumulative basis, Medium-Term Momentum is getting close to hitting its September high.

Momentum: Cumulative Return (12/13/17 - 12/13/18)

On a normalized basis, the factor now sits at +0.97 standard deviations above the mean, which is closely approaching Overbought territory.

Momentum: Normalized Return (12/13/17 - 12/13/18)


In our last note, we discussed how Profitability is currently being flagged as Extremely Oversold, with normalized return at -2.75 standard deviations below the historical mean at the time. While the normalized return continued to drift downward (-0.08 SD), over the past few days we've seen a clear flattening of the curve. This suggests that the factor might be approaching a bottom in the near future. If you recall our analysis of other periods when Profitability had reached these levels, the factor saw a pretty substantial rally once the trough had been established. We continue to advise caution to those who are significantly underweight Profitability, and patience for those with long exposure to the factor.

Profitability: Normalized Return (12/13/17 - 12/13/18)

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


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