JPMorgan: Momentum rotation isn’t a ‘quant quake’ yet


Near record high: Traders work the floor of the New York Stock Exchange. In the past week, the S&P 500 Index rose 1% to retake the 3,000 level and come within 1% of its record high, and the Cboe Volatility Index fell to 13.74, its lowest close since July 29. — AFP

SINGAPORE: The market rotation into momentum and value assets has left some losers in its wake, but it’s no “Volmageddon” like February 2018, according to JPMorgan Chase & Co.

The big shift has garnered attention as investors try to figure out what’s behind the move and the implications for funds. Bonds have had a rough month so far, with yields on 10-year Treasuries surging 40 basis points since the beginning of September.

In the past week, the S&P 500 Index rose 1% to retake the 3,000 level and come within 1% of its record high, and the Cboe Volatility Index fell to 13.74, its lowest close since July 29.

Those moves hardly rival the quantitative and volatility meltdown of February 2018, when stocks plunged and VIX spiked briefly to 50.

Commodity trading advisors -- funds that often use systematic strategies -- and other investors using trend-following approaches suffered big losses this week, drawing comparisons to the so-called Quant Quake of February 2018.

One difference: losses at CTAs are so far about a third of what they were then, JPMorgan strategists led by Nikolaos Panigirtzoglou wrote in a note Sept. 13. CTA positioning is currently extreme in bonds only rather than in equities or other asset classes, the strategists noted.

“The current backdrop is very different, ” the strategists wrote. “We see more room from a technical point of view for the gap between Short Momentum and Long Value equity baskets to close assuming the fundamental triggers of this rotation continue to be in place.”

Equity long/short hedge funds fell just slightly in August and appear to be “practically unaffected” this month by the large sector and style rotations, while equity market-neutral funds that report daily were little changed on the week, Panigirtzoglou wrote.

There’s some anecdotal evidence that equity long/short funds that report only monthly may have been more affected, he said, though the extent of that won’t be seen until their numbers are released next month.

Panigirtzoglou offered some observations on equity market positioning, including:

Not all of the outperforming sectors have been driven by short covering -- for instance, .financials may have benefited from new buyingMost sectors have seen some short-covering this month, suggesting that overall equity positioning is significantly less bearish, or more bullish

Across long/short equity style baskets, the biggest gap was between the short interest of short momentum and long momentum equity baskets; that difference remains wide even after this week’s covering”Despite this month’s big equity sector and style rotations we are not seeing evidence of a Quant Quake, ” the strategists said. — Bloomberg


   

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