Massive Momentum Factor Unwind Triggers ‘Epic’ 7 Z-Score Performance Bleed

On Monday morning, before the opening bell sounded on a new week for Wall Street, Nomura’s Charlie McElligott flagged a mammoth multi-day move in his “Pain Trade” index, which he explained is just the “simple ratio of a ‘Value’ factor proxy versus Momentum'”.

He put things in the context of the recent duration selloff, noting that Value is positively correlated with bear-steepening, while Momentum is inversely correlated to the nascent selloff in rates.

The past week and a half witnessed a 16% move in Charlie’s ‘Pain Trade’ gauge.

Read more: Nomura’s McElligott Talks The ‘Pain Trade’ And What More Bearish Rates Action Would Mean For Equities

Fast forward several hours and this dynamic has accelerated – and “bigly”.

Specifically, Charlie’s “max pain indicator” (which, again, is just a long EBITDA/EV factor against a short Momentum factor) exploded more than 12% on the session. That, folks, is a seven z-score move, and it comes courtesy of Value shorts ripping, while the bottom falls out for secular Growth.

(Nomura, BBG)

“Look at the factor moves and corroborating z-scores today”, McElligott marvels, emphasizing that we’re seeing four and five standard deviation “unwind explosions, as various iterations of ‘Price Momentum’ come unglued due to the complete reversal of everybody’s consensual positioning [with] long Growth getting nuked [and] short Value exploding higher”.

(Nomura, BBG)

Just to flesh this out a bit more, Morgan Stanley’s long/short US equity momentum pair trade index suffered its biggest one-day decline since 2009 (h/t LK).


This is unfolding despite the fact that the initial catalyst – i.e., the duration selloff and bear-steepener impulse – hasn’t really accelerated all that much. As Charlie puts it, the unwind in the equities expression of the long duration trade “has clearly taken on a life of its own”.

Needless to say, this isn’t the best news for some folks.

“This would make for the worst single-day of performance in my model Equities HF L/S portfolio since February 5th / February 8th 2018”, Charlie says.

(Nomura, BBG)

In other words, the worst single-session for the long/short crowd since Vol-pocalypse.


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3 thoughts on “Massive Momentum Factor Unwind Triggers ‘Epic’ 7 Z-Score Performance Bleed

  1. H-Man, you have got to “dumb it down” for me on this article. The nomenclature is foreign to me but my perception is there was obviously some type of a move that was a huge surprise. On bended knee I surrender and request you spit this out in something I can understand.

  2. I love the quants. Their work is great until you really need it. Ford motor bonds were downgraded to junk by moody’s today. They still have investment grade ratings from the other two main agencies but you can bet that isnt going to last long. 84 billion is not small potatoes. What do you think happens to risk assets when financial conditions tighten? You can throw your Greeks and standard deviations right out the f’n window. Then the quants will disappear from view for a couple of years, and you will be poorer for the experience of listening to them. Caveat emptor!

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