{"id":68934,"date":"2020-12-11T09:45:00","date_gmt":"2020-12-11T14:45:00","guid":{"rendered":"https:\/\/ibkrcampus.com\/?p=68934"},"modified":"2023-04-05T11:12:10","modified_gmt":"2023-04-05T15:12:10","slug":"the-value-momentum-rotation-and-innovation","status":"publish","type":"post","link":"https:\/\/www.interactivebrokers.com\/campus\/ibkr-quant-news\/the-value-momentum-rotation-and-innovation\/","title":{"rendered":"The Value-Momentum Rotation and Innovation"},"content":{"rendered":"\n<p class=\"wp-block-paragraph\">On Nov 9, Pfizer reported that its COVID-19 vaccine had proven to be 90% effective in early testing. That day, beaten-down Value stocks like Carnival Cruise Lines (CCL) shot up and high-flying Momentum stocks like Zoom (ZM) got beaten down. Market participants seemed to think that the year\u2019s divergence between these two groups was now overstated and that a return to normal was due.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">The Value-Momentum rotation on the 9th was swift and violent. Below we plot the cumulative year to date returns for long\/short portfolios (equally weighted within top\/bottom deciles) formed using the Value and Momentum factors from our&nbsp;<a href=\"https:\/\/extractalpha.com\/\">ExtractAlpha Risk Model<\/a>&nbsp;to show the general anticorrelation of Value and Momentum this year along with the November 9 rotation \u2013 noting that there was a similar rotation back in early June.<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img decoding=\"async\" width=\"1100\" height=\"767\" data-src=\"\/campus\/wp-content\/uploads\/sites\/2\/2020\/12\/extractalpha-dec-1-1100x767.png\" alt=\"\" class=\"wp-image-68937 lazyload\" data-srcset=\"https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2020\/12\/extractalpha-dec-1-1100x767.png 1100w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2020\/12\/extractalpha-dec-1-700x488.png 700w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2020\/12\/extractalpha-dec-1-300x209.png 300w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2020\/12\/extractalpha-dec-1-768x535.png 768w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2020\/12\/extractalpha-dec-1-1536x1071.png 1536w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2020\/12\/extractalpha-dec-1.png 1704w\" data-sizes=\"(max-width: 1100px) 100vw, 1100px\" src=\"data:image\/svg+xml;base64,PHN2ZyB3aWR0aD0iMSIgaGVpZ2h0PSIxIiB4bWxucz0iaHR0cDovL3d3dy53My5vcmcvMjAwMC9zdmciPjwvc3ZnPg==\" style=\"--smush-placeholder-width: 1100px; aspect-ratio: 1100\/767;\" \/><\/figure>\n\n\n\n<p class=\"wp-block-paragraph\">There\u2019s been another less well-known trend this year: the most innovative companies \u2013 those which are R&amp;D intensive and with growing digital footprints \u2013 have outperformed significantly. We can quantify the innovation of these companies with two alternative datasets:<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">1. By using data on\u00a0<strong>patents and work visas<\/strong>\u00a0from ExtractAlpha\u2019s\u00a0ESGEvents Library<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>ESGEvents Library is a cleaned, tickerized dataset of U.S. government filings, including company patent applications and grants from the USPTO as well as H1B and Permanent visa applications from the Department of Labor.<\/li>\n\n\n\n<li>We create an Innovation factor for thousands of U.S. stocks based on company- and industry-level engagement in IP activities and knowledge worker hiring.<\/li>\n<\/ul>\n\n\n\n<p class=\"wp-block-paragraph\">2. By tracking growth in the company\u2019s<strong>\u00a0digital footprint<\/strong>, as captured in the\u00a0Digital Revenue Signal\u00a0(DRS)<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>DRS scores thousands of companies globally each day on their online engagement across social media, web search, web traffic, and other metrics.<\/li>\n\n\n\n<li>DRS is predictive of both revenue surprises and earnings period returns.<\/li>\n<\/ul>\n\n\n\n<p class=\"wp-block-paragraph\">Below, we create long-short, dollar neutral portfolios based on each of these factors, equally weighted and rebalancing daily (they are fairly low turnover, especially the Innovation factor, and for this purpose we ignore transaction costs). We restrict the universe here to liquid U.S. stocks. The 2020 year-to-date performance of these portfolios have been incredibly strong: approximately 25% for DRS and over 50% for Innovation.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Initially, we might think that the most innovative companies were the ones which experienced Momentum this year. But neither of the above innovation signals look like the Momentum lines we showed before, and interestingly, we didn\u2019t see any corresponding crash in the innovation signals on Nov 9. This implies that we can separate Innovation from Momentum. This year, the companies which were most rewarded could be identified using these innovation-related metrics, and they were not punished when the market rotated away from Momentum.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">We can see from the following (admittedly anecdotal) examples of innovative companies that their returns on Nov 9 were driven by their Momentum exposure, and not how innovative they are:<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img decoding=\"async\" width=\"1100\" height=\"767\" data-src=\"\/campus\/wp-content\/uploads\/sites\/2\/2020\/12\/extractalpha-dec-2-1100x767.png\" alt=\"\" class=\"wp-image-68940 lazyload\" data-srcset=\"https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2020\/12\/extractalpha-dec-2-1100x767.png 1100w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2020\/12\/extractalpha-dec-2-700x488.png 700w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2020\/12\/extractalpha-dec-2-300x209.png 300w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2020\/12\/extractalpha-dec-2-768x535.png 768w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2020\/12\/extractalpha-dec-2-1536x1070.png 1536w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2020\/12\/extractalpha-dec-2.png 1702w\" data-sizes=\"(max-width: 1100px) 100vw, 1100px\" src=\"data:image\/svg+xml;base64,PHN2ZyB3aWR0aD0iMSIgaGVpZ2h0PSIxIiB4bWxucz0iaHR0cDovL3d3dy53My5vcmcvMjAwMC9zdmciPjwvc3ZnPg==\" style=\"--smush-placeholder-width: 1100px; aspect-ratio: 1100\/767;\" \/><\/figure>\n\n\n\n<ul class=\"wp-block-list\">\n<li>high-momentum innovative companies such as chip makers and online retailers erased their earlier gains<\/li>\n\n\n\n<li>low-momentum innovative companies which had been hit more by COVID-19 recovered<\/li>\n<\/ul>\n\n\n\n<figure class=\"wp-block-image size-large\"><img decoding=\"async\" width=\"680\" height=\"228\" data-src=\"\/campus\/wp-content\/uploads\/sites\/2\/2020\/12\/extractalpha-dec-3.jpg\" alt=\"\" class=\"wp-image-68938 lazyload\" data-srcset=\"https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2020\/12\/extractalpha-dec-3.jpg 680w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2020\/12\/extractalpha-dec-3-300x101.jpg 300w\" data-sizes=\"(max-width: 680px) 100vw, 680px\" src=\"data:image\/svg+xml;base64,PHN2ZyB3aWR0aD0iMSIgaGVpZ2h0PSIxIiB4bWxucz0iaHR0cDovL3d3dy53My5vcmcvMjAwMC9zdmciPjwvc3ZnPg==\" style=\"--smush-placeholder-width: 680px; aspect-ratio: 680\/228;\" \/><\/figure>\n\n\n\n<p class=\"wp-block-paragraph\">We view innovation and digital demand as new, alternative data-driven alphas or perhaps \u201calternative risk premia\u201d in the coming years. These signals have some correlation to Momentum and Growth (and the inverse of Value), but clearly they capture something else, an underlying, diversifying factor and something which will be increasingly important in the years to come as technology continues to advance.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Visit ExtractAlpha to learn more about this research: <a href=\"https:\/\/extractalpha.com\/2020\/12\/08\/value-momentum-rotation-and-innovation\">https:\/\/extractalpha.com\/2020\/12\/08\/value-momentum-rotation-and-innovation<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Join ExtractAlpha for an overview of innovation and digital demand as the new, alternative data-driven alphas or perhaps &#8220;alternative risk premia&#8221;.<\/p>\n","protected":false},"author":342,"featured_media":38080,"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],"tags":[8910,3803,1007,494,5926,6974,5548],"contributors-categories":[13689],"class_list":["post-68934","post","type-post","status-publish","format-standard","has-post-thumbnail","category-data-science","category-ibkr-quant-news","category-quant-development","tag-alphas","tag-alternative-data","tag-innovation","tag-quant","tag-quantamental","tag-risk-premia","tag-value-momentum","contributors-categories-extractalpha"],"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 v28.1) - https:\/\/yoast.com\/product\/yoast-seo-premium-wordpress\/ -->\n<title>The 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