TALKING POINT VIOLENT ROTATION – MOMENTUM STOCKS ARE SINKING WHILE VALUE SHARES ARE COMING BACK
1060
Bloomberg US Pure Momentum Portfolio Total Return
1040 1000 Bloomberg US Pure Value Portfolio Total Return
2300 2250
Index Level
1020
2200 Mar
Apr
May
the market since the financial crisis is that the rising market has been driven by relatively few shares, underlining the riskaverse stance taken by investors. Quality and momentum has been the only game in town for many years. The underperformance of value has been so stark that some people had begun to utter what famed investor John Templeton described as the most dangerous words in the world of investing, ‘this time it’s different’. Then Monday happened and remarkably, months of outperformance were wiped out in just two days. The speed of the snap back caught the markets by surprise. According to investment bank JP Morgan, value stocks saw one of their biggest single-day rallies ever, relative to momentum stocks and represented a ‘five standard deviation event’. Standard deviation simply measures how far the most extreme points are from the average. Five standard deviations are so rare an event that in 18
| SHARES | 19 September 2019
2019
Jun
Jul
Aug
Source: Bloomberg
Kingfisher has suddenly found itself the centre of attention following the market rotation
theory they only happen every 30 years. And this wasn’t just a UK phenomenon, it happened across other stock markets too. The quant team at investment bank Nomura described the ‘momentum shock’ in the US market as the second largest drawdown in history, going back to 1984.
from any reduction in value of the stock. Kingfisher is one of the most heavily shorted stocks in the UK, with around 5% of its shares held short according to shorttracker.com. It’s likely that some of the move in Kingfisher was related to investors closing their short positions in order to control risk.
SHORT INTEREST The biggest winners on 9 September also had something else in common; some of them were heavily ‘shorted’. Fund managers short stocks that they believe will fall in price because the business is in trouble or will continue to underperform. They profit
IF THE UNWIND CONTINUES, WHICH STOCKS ARE MOST AT RISK? We have created a screen to find the stocks most at risk to further mean reversion as well as some value stocks which might benefit if the rally continues. We screened for those stocks within the FTSE 350 which