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Markets momentum stocks

Why September Is Ripe For A ‘Monster’ Momentum Rally, According To One Strategist

Hint: seasonality.

On Tuesday, Nomura’s Charlie McElligott documented what, according to his models, is the worst 2-month run for consensus U.S. equities funds’ “long Growth, short Value’” strategy “since the ‘great market-neutral unwind’ of 2016.”

But there was a “silver lining”. Here’s Charlie:

This sets up VERY well (from an entry-point perspective) for a tactical ‘Long U.S. Equities Momentum Factor’ trade for the month of September—or, just ‘Short Momentum Shorts’ as this leg is what drives essentially all of the seasonal performance trend for Momentum in September.

Fast forward to Wednesday, and in his latest missive, McElligott notes what we spent a ton of time documenting earlier this week: namely that for the foreseeable future, the risk-on trade depends on a weaker dollar.

The greenback’s relentless ascent took a breather this week on the heels of Donald Trump’s most recent derogatory remarks about Fed policy and considering the stronger dollar has been at the heart of the carry unwind and is the proximate cause of EM pain, it’s no wonder that some folks were relieved to see the Bloomberg dollar index fall for five consecutive sessions, the longest losing streak since February.

BBDXY

(Bloomberg)

“Wednesday marked the sixth consecutive day of USD weakness, again feeding the ‘virtuous cycle’ for risk-assets: Emerging Markets further stabilize, Commodities again higher, Inflation Expectations firm…all of which is keeping global Equities ‘in place / supported'”, McElligott wites. This is shaping up to be the best week since February for the downtrodden EM equities index.

EMStocks

(Bloomberg)

And here’s a five-day of the BCOM:

BCOM

(Bloomberg)

After flagging BRL weakness as a sign that you shouldn’t “pop that champagne just yet”,  McElligott expands a bit on Tuesday’s call for a momentum rally in September. Here’s the rationale (hint: it’s seasonality-centric):

Over the past week, I have “teased” a tactical “Long U.S. Equities ‘1Y Momentum’ Factor” trade view for the month September—again noting the powerful seasonality, but with additional factors. Since 1984, September on average posts the 2nd best monthly return for the “1Y Momentum” factor strategy of any month—in particular, it’s the “short 1Y Momentum shorts” which drive the large performance, as laggards come under meaningful pressure, and thus contribute effectively the entirety of a market-neutral “Momentum” strategy’s gain.

SeptMomo

Why does this phenomenon occur?  My simple rationale is as follows:

  • Studies on “Momentum” factor seasonality have long-shown that the quarter-end months of June, September and December (not March, FWIW) show outsized returns, as since 1984, those particular months post three of the four best average monthly performances for “Momentum” mkt neutral strategies
  • September is also the quarter-end month which overlaps with many Mutual Fund “Year Ends” (alongside Oct)—this in-turn drives outsized “tax loss” selling, or behavior where institutional investors abandon “losers” to avoid reporting “embarrassing” ownership of said “loser” stock picks.

He also says the recent downturn in the Citi economic surprise index is likely reverse based on seasonality. On Wednesday morning, we noted that the U.S. index is now more negative than its European counterpart for the first time since Q1, marking a reversal of the 2018 econ divergence narrative.

CitiSurprise

(Bloomberg)

Well, here’s what a decade worth of seasonality predicts:

Seasonality

(Bloomberg)

But there was a caveat in Charlie’s Tuesday note when it comes to the possibility of an equities “mania” in September. To wit:

However, mid- to late- October still poses a heightened “financial conditions tightening tantrum” risk as “QT” escalation from the Fed / ECB / BoJ shows high potential to drive higher interest rate volatility—and with it, higher cross-asset volatility.

Suffice to say he reiterates that on Wednesday and rather than regale you further, we’ll just leave you with the visual which is poignant enough on its own…

G4

(Nomura)

 

 

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