Momentum Models Continue to Underperform
- By Ben Ford and Bilal Hafeez
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Summary
- Momentum models slipped -0.2% over the past week. Rates (+0.4) were the only positive performer with FX (-0.3%) and equities (-0.9%) underperforming.
- Momentum models underperformed across all three asset classes over a three-month timeframe (equities: -5.3%, FX: -1.7%, and rates: -1.0%).
Market Implications
- Momentum models are heavily bullish Gilts – we are long 10Y Gilts (target: 3.5%; stoploss: 4.4%). They are also heavily bullish JGBs – we are paying the JPY 1Y1Y (target: 1%; stoploss: 0.3%).
- In FX, they have flipped bullish GBP/USD – we remain bearish GBP/USD.
Latest Signals
Equity momentum models flipped bullish the S&P 500 and FTSE-100 but remain bearish the Nikkei and DAX (Chart 1). We think most of the correction has played out.
Rates momentum models have added to UK bullishness, now heavily bullish Gilts – we remain long 10Y Gilts (target: 3.5%; stoploss: 4.4%). Otherwise, they are heavily bullish JGBs – we are paying the JPY 1Y1Y (target: 1%; stoploss: 0.3%) – and Bunds and bullish US 5Y, 10Y and long bonds. Our DM rates PCA model is flagging 14 trades while our US rates technical report suggests further weakness in the WN and TY contracts.
Turning to FX, momentum models have flipped bullish GBP/USD from heavily bearish – we remain bearish GBP/USD. They also flipped bullish EUR/USD. Elsewhere, they are heavily bullish EUR/NOK and USD/CAD, bearish USD/JPY, EUR/CHF – which we think heads higher in a positive FX carry environment absent SNB hawkishness, and AUD/USD and NZD/USD.
Model Performance
Momentum models slipped -0.2% over the past week as positive rates momentum model (+0.4% WoW) performance was more than offset by souring FX (-0.3%) and equity (-0.9%) performance. Momentum models have registered negative returns across all three asset classes over the past three months (equities: -5.3%, FX: -1.7%, and rates: -1.0%).
*The basic strategy is to use returns (lookback windows) to give buy/sell signals. So, if the US stocks are up over the past 3 months, you buy, otherwise, you sell (note I use excess returns).
Ben Ford is a Researcher at Macro Hive. Benjamin studied BSc Financial Mathematics at Cardiff University and MSc Finance at Cass Business School, his dissertations were on the tails of GARCH volatility models, and foreign exchange investment strategies during crises, respectively.
Bilal Hafeez is the CEO and Editor of Macro Hive. He spent over twenty years doing research at big banks – JPMorgan, Deutsche Bank, and Nomura, where he had various “Global Head” roles and did FX, rates and cross-markets research.