Momentum Models Flag the S&P 500 to Underperform

When evaluating the performance of our momentum models we are considering the average performance across the one-, three-, and 12-month momentum models.

Market Implications

• Momentum model signals sit in contrast to our view to fade CHF strength. They are also yet to get fully on board with our bullish USD basket trade (vs EUR, CHF and GBP).
• They also agree with our bias to be bearish on US rates.

Summary

• Rates momentum models (+0.2% WoW) outperformed equity (+0.1% WoW) and FX momentum models (0.0% WoW) over the past week.
• Rates momentum models are the best-performing models over a three-month time frame (+2.5%). Both equity (-2.2%) and FX momentum models (-0.1%) struggled.
• Momentum models are signalling S&P 500 underperformance, higher global yields led by the US, and for JPY, AUD, and SEK to continue to depreciate.

Latest Signals

Equity momentum models shifted to signal S&P 500 underperformance (versus Nikkei, DAX and FTSE-100), though this sits against Viresh’s bias for European equities to underperform US equities. The S&P 500 needs to trade at fresh year lows for momentum models to turn heavily bearish.

Meanwhile, rates momentum models remain heavily bearish on USTs and comparatively less bearish on Gilts. We had shared a similar sentiment, by paying 1Y1Y US OIS vs (rec) 1Y1Y SONIA, but having gained 162bps on the trade, we rotate to outright paying US 1Y1Y with our target at 5.0% following the Fed’s September pause (Dominique’s FOMC review)

Turning to FX, momentum models have flipped bearish EUR/CHF and USD/CAD. This contrasts with our view that recent CHF strength may fade which Bilal sees value in trading as part of a basket (short EUR, CHF, GBP) against USD. We like the bullish USD theme against particular EM, too; Mirza adds long USD/TWD to go alongside his long USD/INR trade.

Model Performance

Rates momentum models (+0.2% WoW) proved the best performing model over the past week with no model registering a loss, on average. It is the best model over a three-month time frame, too (+2.5%). Equity (-2.2%) and FX momentum models (-0.1%) both registered losses through the period.

*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).

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.

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.

Photo Credit: depositphotos.com

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)