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FANG momentum

‘Out Of Mo”: Why One Man (Chris) Thinks Momentum Stocks And Strategies May See More Downside

Of systematic selling and calendar effects.

Wells Fargo’s Chris Harvey is back!

Regular readers know Chris is a favorite in these pages, primarily because he has a colorful style that often finds him lapsing into colloquialisms.

As far as I’m aware, Chris is the only analyst in the history of analysts who has ever written a piece of research that necessitated a footnote that defined the term “POPO” for “the uninitiated” where “the uninitiated” presumably referred to most of his clients assuming Wells doesn’t do a lot of business with trap lords.

When last we checked in on Chris, he was asking whether, in light of the myriad geopolitical risks that litter the investment landscape, it made sense to barricade yourself in the basement. Specifically, he said this:

Is it run for the bunker and grab all the cash & canned goods you can or grit your teeth and ride out the storm because it’s more squall than Cat 5?

Ultimately, his answer to that question was “no”, but in a note dated Monday, Harvey is out suggesting that – and yes, this is a quote – PMs might me “Out of Mo’” and thus “forced to mitigate portfolio risk to help stabilize performance in the waning days of 1H18”.

That, according to Chris, will “keep downward pressure on Momentum stocks.” Here are the two dynamics he cites:

Risk Model: In our view, the first driver is systematic. We expect risk models to ‘light up’ now that Momentum factors have experienced adverse short-term performance. In some cases, we think the model will force managers to reduce Momentum exposure.

Portfolio performance/time of the year: The second dynamic at play is a race against time. In the last 3 trading days, the Large Cap Fundamental funds in our universe have lost 64bps of relative return. At the current rate, relative performance would slump to about +100bps by Friday vs. +245bps from this year’s high (6/20/18). There are 4 trading days until the end of 1H18, when portfolio performance gets locked-in for crucial 3- & 5-yr numbers. We view this as a significant short-term incentive to, at the margin, limit the bleed and hold onto existing relative performance. In general, we think wholesale portfolio changes are too aggressive; however, portfolio trimming or profit taking where prices are really moving (such as with Momentum names) could mitigate some performance decay before 1H18 ends.

He goes on to note that the 200-DMA on the ETF (that damn MTUM) was just 4% away as of Monday’s close. Here’s a possibly useful chart:

MTUM

As Bloomberg’s Luke Kawa reminds you – in a post citing the same note from Harvey – “technology stocks account for 40 percent of MTUM by market capitalization. Throw in Netflix and Amazon, which are listed as consumer discretionary, and that share rises to nearly 50 percent.”

Holdings

And listen, if you’re wondering whether it’s “normal” for Chris to make this kind of call (i.e., a rotational bias out of tech/growth/momentum), the answer is “no”. Here, I’ll let him tell you:

Please note the idea of a PM shift away from Tech/Momentum is a distinct departure for us. At the end of the year, we suggested there would be no Great Rotation from Growth to Value. During the Feb ’18 sell-off, we said there would be no Tech/Momentum capitulation from the big ‘Long Onlys’ and for the most part there wasn’t.

So “please note” that, ok? But also “note” that for the time being, Chris thinks calendar and portfolio effects might end up effectively forcing PMs to try and preserve outperformance by steering clear of something that’s taken a recent turn for the worst.

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