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The Markets Are Up But We’re Not That Excited...Time For Mean Reversion?

With the markets continuing to shrug off negative unemployment news and health uncertainty of re-opening this month, we wanted to take this opportunity to introduce the family of mean reversion factors. Many of you are feeling tense about the recent rally, and are possibly looking to take defensive actions. Mean reversion factors can help highlight companies who’s recent returns (positive and negative) are at the extremes of the entire market. Coupled with fundamental analysis, these factors can be used as indicators to help better time investment decisions.

Axioma’s Short-Term Momentum Factor

In our first post of a multi-part series, we focus our attention this week to Axioma’s Short-Term Momentum (“STM”) factor. It is based on the cumulative return of an asset over the previous 20 days - assets with the highest cumulative return will have the largest positive exposures to this factor, and assets with the lowest cumulative returns will have the largest negative exposures to this factor.

Typically the factor return associated with this factor is consistently negative and volatile. Below is the STM factor return from 1/3/2007 to 5/7/2020:

Screen Shot 2020-05-09 at 3.18.07 PM.png

Why is the factor return so negative?

As a security performs extremely well (or poorly) over a 20 day period relative to the entire market, it’s exposure to STM increases. Quantitative traders typically follow this trend and make a bet that the price will revert to normalized levels, often guided by peer stock behavior. Over the past 10-15 years, the percentage of volume of quantitative trading in the markets has risen to levels cited higher than 90%. The more quantitative traders piling up on the mean reversion trade, the more likely it is to fall (or rise) in price. Since the STM factor return represents the return of a portfolio holding thousands of securities, we see that this effect works quite well.

Because the factor return for STM is generally negative, the higher the exposure to STM (i.e. the more the outperformance over the recent 20 days), the more the STM factor will drag down performance. The opposite goes for assets underperforming over the recent 20 days - STM exposure drops and the negative STM factor return starts to positively contribute to our return. STM is accordingly called “the reversal factor” - as an asset starts to outperform, STM factor is the gravity that performs the opposite of the asset and pulling it back to earth.

Which Companies are Most Exposed to STM Today?

Let’s focus on the companies in the US market with the highest positive STM exposures today. Below we filtered the Russell 3000 to the securities above $1B in market cap and >$5mm of ADV with exposures in the top 5% of STM. We find a total of 37 securities in the following industries:


Given the COVID environment bouying up vaccine and ventilator makers, work-from-home enabling software companies, and e-commerce companies, we would expect to see Biotech, Software, Internet Retailing, and Healthcare Equipment represented. What’s interesting is that we also see 5 names in the Oil & Gas sector, and singular names spread across insurance, autos, and specialty retailers.

When we focus on the Oil & Gas sector, we we that Antero Midsteam leads the pack with an STM exposure of +3.37.

Screen Shot 2020-05-09 at 2.46.11 PM.png

Antero is up 78.63% over the past 20 trading days (1 month):


And we can see that in a space of ~2 weeks, its STM exposure had a massive move from a score of -1 (bottom 33% of the market in returns) to +3.5 (>99% of the market).

Screen Shot 2020-05-09 at 2.48.18 PM.png

As a fundamental investor, if you believe Antero Midstream has rallied to unsustainable valuation levels, its STM exposure will help you align the timing of your sell with your thesis.

Next week we will examine a few other mean reversion factors, and see whether they can provide us more color on the level of frothiness of companies and industries.

US & Global Market Summary

In exciting news, our partners at Axioma have begun publishing weekend model updates, allowing us to provide you with Friday data going forward. After this week, our market and factor summary will shift to cover Monday - Friday model dates.

US Market: 5/1/20 - 5/8/20

US market 20200509.png
US Stock Market Cumulative Return: 5/1/2020 - 5/8/2020
  • The market shrugged off more abysmal employment data, with stocks closing near highs on Friday to secure a weekly gain after two straight down weeks.
  • The Labor Department reported 20.5 million jobs lost in April (the worst month of all time), following a revised loss of 870,000 for March. The unemployment rate now sits at 14.7%, up from 3.5% prior to the pandemic.
  • More than 77,000 Americans have died from COVID-19, as confirmed cases in the US exceeded 1.29 million.
  • Yield on two-year Treasuries hit a record low of 0.105% before settling at 0.14%.
  • US Crude Oil rallied up 25% this week due to production cuts and optimism about increased demand for gas as stores started to open up, driving a strong week for energy stocks.

Factor Update: Axioma US Equity Risk Model (AXUS4-MH)

US table may 9.png
Methodology for normalized factor returns
  • Growth was the biggest climber this week, as it moved from positive neutral territory to the edge of being Overbought.
  • Volatility saw continued strength as it headed deeper into Extremely Overbought territory.
  • The rise in Value saw slight deceleration, as it headed towards an Extremely Overbought designation.
  • Market Sensitivity also slowed down as it headed higher into Extremely Overbought space.
  • Profitability fell nearly a full standard deviation as it continued to crash from its recent peak of +6.47 SD above the mean on 3/20, and is now on the verge of becoming an Oversold factor
  • Size was again the week’s biggest loser, falling more than one standard deviation and deep in Extremely Oversold territory at -2.67 SD below the mean.
  • US Total Risk (using the Russell 3000 as proxy) saw a slight decline of 13bps.

Factor Update: Axioma Worldwide Equity Risk Model (AXWW4-MH)

WW table may 9.png
Methodology for normalized factor returns

  • Just like in the US, Growth was the biggest winner worldwide as it rose nearly a whole standard deviation and approached an Extremely Overbought designation.
  • The recovery in Exchange Rate Sensitivity continued as it surged close to +1 SD and exited Oversold space. We discussed this factor in detail after it had plummeted to -4.9 SD below the mean on 3/31 (Part 1 and Part 2).
  • Market Sensitivity pretty much stayed pat at +3.2 SD above the mean.
  • The rise in Volatility decelerated as it approached +3 SD above the mean.
  • Earnings Yield fell -0.85 SD from slightly above neutral towards an Oversold designation.
  • Global weakness in Size persisted as it fell over one standard deviation and neared -3 SD below the mean.
  • Profitability also fell over one full standard deviation for the second week in a row, now sitting in neutral territory after being +3.98 SD above the mean on 4/2.
  • Global Risk (using the ACWI as proxy) decreased by 14bps, in line with US risk.


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