{"id":36172,"date":"2020-02-26T08:00:53","date_gmt":"2020-02-26T13:00:53","guid":{"rendered":"https:\/\/ibkrcampus.com\/?p=36172"},"modified":"2022-11-21T09:45:06","modified_gmt":"2022-11-21T14:45:06","slug":"smart-beta-book-the-val-mo-rotation-qmit","status":"publish","type":"post","link":"https:\/\/www.interactivebrokers.com\/campus\/ibkr-quant-news\/smart-beta-book-the-val-mo-rotation-qmit\/","title":{"rendered":"Smart Beta Book &#8211; The Val\/ Mo rotation &#8211; QMIT by QuantZ"},"content":{"rendered":"\n<p class=\"wp-block-paragraph\"><em>In Part I of this week&#8217;s commentary, we will feature Value-Momentum convergence play. Part II will focus on the heatmaps.<\/em><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>Value-Momentum convergence play?<\/strong><\/h2>\n\n\n\n<ul class=\"wp-block-list\"><li><em>Our August 26th (2019) weekly Smart Beta Book concluded      rather presciently with, \u201cFinally, it\u2019s important to put these YTD moves      in the context of their longer term LTD history since the 3 worst ESBs at      present (RV, DV, Size) are also the Top 3 best ESBs LTD (since Jan 2000)      suggesting a significant opportunity when these factors revert back to      their LT means.\u201d From Aug 28th \u2013 Sept 16th Deep Value came screaming back ~+24% while PMOM crashed ~-23% vindicating that call. &nbsp; &nbsp;<\/em><\/li><li><em>On Feb 3rd (2020), we noted that our Value was      \u201cstarting to look oversold\u201d &amp; that \u201ccontrary to the oft observed      January effect there were no reversals in sight as 2019 trends remained      intact.\u201d We also observed that based on bottom up aggregate ranks, Tech      was looking rather stretched while Energy was oversold on technicals.<br>      Needless to say \u201cwe witnessed a major Val-Mo rotation on Feb 5th with      Value &amp; Reversals up as much as +4% driven by the bounce in Energy vs      PMOM &amp; Risk down ~-2% ($ neutral) as the growthy tech names sold off\u201d      &nbsp;immediately following our note.<\/em><\/li><li><em>On Feb 10th (2020), we presented \u201cour rationale behind      a potential Value-Momentum rotation\u201d based on the \u201cunderperformance of      Value over the last 3 years which has resulted in Value factor becoming      \u201ccheaper\u201d\u201d. Indeed Value-Momentum spreads are historically wide as      indicated in the below graph with the 1Yr and 3Yr spread Z-scores at -1.6      and -2.2 respectively. In fact the spread exceeded 20% within the first 6      weeks of the year. N.B. &#8211; These Z-scores are with respect to the full 20+      year history of the spread returns in our database.<\/em><\/li><\/ul>\n\n\n\n<figure class=\"wp-block-image size-large\"><img decoding=\"async\" width=\"624\" height=\"314\" data-src=\"\/campus\/wp-content\/uploads\/sites\/2\/2020\/02\/qmit-val-ratio-1.png\" alt=\"\" class=\"wp-image-36184 lazyload\" data-srcset=\"https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2020\/02\/qmit-val-ratio-1.png 624w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2020\/02\/qmit-val-ratio-1-300x151.png 300w\" data-sizes=\"(max-width: 624px) 100vw, 624px\" src=\"data:image\/svg+xml;base64,PHN2ZyB3aWR0aD0iMSIgaGVpZ2h0PSIxIiB4bWxucz0iaHR0cDovL3d3dy53My5vcmcvMjAwMC9zdmciPjwvc3ZnPg==\" style=\"--smush-placeholder-width: 624px; aspect-ratio: 624\/314;\" \/><\/figure>\n\n\n\n<ul class=\"wp-block-list\"><li><em>There is a huge dispersion in the valuation spread of\n     the Value factor itself, as apparent from the graph below. In general, the\n     valuation spread between defensive (low vol) + growth\/ momentum vs\n     cyclical names has (by some measures) exceeded the outlandish levels\n     attained during the Nasdaq bubble (as emblematic in Tech vs Energy). Key\n     catalyst for Value remains the steepness of the curve for Financials &amp;\n     Cyclicals to ignite. Additionally, Energy being in doldrums has been\n     &nbsp;detrimental to Value on the long side but was a part of the reversal\n     story last week. As the valuation gap amongst Value Longs vs Shorts\n     narrows we should expect to see the Value factor outperform on an EMN\n     basis (either because the multiples on the long side revert to the mean or\n     more likely those on the short side compress).<\/em><\/li><\/ul>\n\n\n\n<figure class=\"wp-block-image size-large\"><img decoding=\"async\" width=\"647\" height=\"314\" data-src=\"\/campus\/wp-content\/uploads\/sites\/2\/2020\/02\/qmit-val-ratio-2.png\" alt=\"\" class=\"wp-image-36186 lazyload\" data-srcset=\"https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2020\/02\/qmit-val-ratio-2.png 647w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2020\/02\/qmit-val-ratio-2-300x146.png 300w\" data-sizes=\"(max-width: 647px) 100vw, 647px\" src=\"data:image\/svg+xml;base64,PHN2ZyB3aWR0aD0iMSIgaGVpZ2h0PSIxIiB4bWxucz0iaHR0cDovL3d3dy53My5vcmcvMjAwMC9zdmciPjwvc3ZnPg==\" style=\"--smush-placeholder-width: 647px; aspect-ratio: 647\/314;\" \/><\/figure>\n\n\n\n<ul class=\"wp-block-list\"><li>\u200b\u200b\u200b\u200b<em>Historically,\n     the largest momentum crashes have been precipitated by short squeezes at\n     market inflection points (e.g., in the aftermath of the Nasdaq &amp; 2008\n     crashes), whereas, we are now potentially looking at the exact opposite\n     viz., a situation where the overbought Longs may actually lead the factor\n     selloff in EMN terms. &nbsp;<\/em><\/li><\/ul>\n\n\n\n<figure class=\"wp-block-image size-large\"><img decoding=\"async\" width=\"666\" height=\"298\" data-src=\"\/campus\/wp-content\/uploads\/sites\/2\/2020\/02\/qmit-val-ratio-3.png\" alt=\"\" class=\"wp-image-36187 lazyload\" data-srcset=\"https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2020\/02\/qmit-val-ratio-3.png 666w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2020\/02\/qmit-val-ratio-3-300x134.png 300w\" data-sizes=\"(max-width: 666px) 100vw, 666px\" src=\"data:image\/svg+xml;base64,PHN2ZyB3aWR0aD0iMSIgaGVpZ2h0PSIxIiB4bWxucz0iaHR0cDovL3d3dy53My5vcmcvMjAwMC9zdmciPjwvc3ZnPg==\" style=\"--smush-placeholder-width: 666px; aspect-ratio: 666\/298;\" \/><\/figure>\n\n\n\n<ul class=\"wp-block-list\"><li><em>With Covid-19 rapidly spreading across Italy this\n     weekend not to mention the series of infections in Japan &amp; Korea,\n     markets are likely to remain under pressure near term as they start\n     pricing in a global (not just Asian) slowdown. Many small businesses in\n     China &amp; HK are likely to suffer or shutter while simultaneously\n     squeezing the global supply chain. It became clear this weekend that the\n     West is not immune to the contagion &amp; that we may be looking at a\n     global pandemic which is far from priced in given that US equities have\n     been making new highs lately. The selloff last week led by the growth\/\n     momentum complex could therefore continue (barring further central bank\n     stimulus) which is one leg of our Val-Mo convergence call.<\/em><\/li><li><em>The negative market contagion and uncertainty emanating\n     from Covid-19 remains the chief risk to our factor rotation thesis.\n     However, this will likely be counter-balanced by another wave of fiscal\n     &amp; monetary stimulus worldwide which would be the catalyst for Value\n     &amp; cyclicals to rebound significantly at the expense of overpriced bond\n     proxies (aka the Low Vol bubble).<\/em><\/li><li><em>It\u2019s no surprise that markets have been inured to risks\n     by the omnipresent global coordinated central bank puts. Episodic spikes\n     in vol &amp; dispersion are usually quite favorable for EMN factor\n     investing although not necessarily on the long side (unless one happens to\n     be positioned in the right factors). Stay tuned for more.<\/em><\/li><\/ul>\n","protected":false},"excerpt":{"rendered":"<p>QMIT by QuantZ presents the weekly Smart Beta Book &#8211; The Val\/ Mo rotation &#8230; Are we there yet?<\/p>\n","protected":false},"author":269,"featured_media":21725,"comment_status":"closed","ping_status":"open","sticky":true,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":"","jetpack_post_was_ever_published":false},"categories":[339,338,341,352,344],"tags":[851,6185,4923,6585,4922,6110,6111,5757,6584,494,5926,5436,6586],"contributors-categories":[13678],"class_list":["post-36172","post","type-post","status-publish","format-standard","has-post-thumbnail","category-data-science","category-ibkr-quant-news","category-quant-development","category-quant-north-america","category-quant-regions","tag-algo-trading","tag-composite-signal-monitor-performance","tag-computational-finance","tag-covid-19","tag-econometrics","tag-enhanced-smart-beta","tag-factor-covariance-matrix","tag-factor-investing","tag-heatmap-machine-learning","tag-quant","tag-quantamental","tag-smart-beta","tag-val-mo-convergence","contributors-categories-qmit-quantz-machine-intelligence-technologies"],"pp_statuses_selecting_workflow":false,"pp_workflow_action":"current","pp_status_selection":"publish","acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO Premium plugin v26.9 (Yoast SEO v28.8) - https:\/\/yoast.com\/product\/yoast-seo-premium-wordpress\/ -->\n<title>Smart Beta Book &#8211; The Val\/ Mo rotation &#8211; QMIT by QuantZ<\/title>\n<meta name=\"description\" content=\"QMIT by QuantZ presents the weekly Smart Beta Book - The Val\/ Mo rotation ... 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For the 3 years prior, he managed a Prop Trading desk at RBC where he served as Portfolio Manager for Quant EMN, Short Term &amp; Event Driven portfolios. Prior to that, he served as Director and Senior Proprietary Trader at Deutsche Bank (now SABA) where he managed Quant EMN portfolios of significant size with input in Event Driven and the larger Capital Structure Arbitrage desk mandates. Prior to that he was a co-founder of Quant Strategies at Merrill Lynch IM (now BlackRock), where his investment role spanned a dozen quantitatively managed funds with up to $30 Billion in AUM. The ML Large Cap Series funds (with MLIM President &amp; CIO as Senior PM) were 5* rated, in the Lipper top 5% &amp; won several WSJ + Morningstar awards by the time of his departure. In addition to being a founding member of Risk at MLIM, he was also a Manager of the Risk Analytics &amp; Research Group at Ernst &amp; Young where he co-created Raven TM. He also created the AIRAP methodology for hedge funds. 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