Momentum Models Slip as All Strategies’ Returns Flat to Slightly Lower

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

Summary

• Momentum models were down 0.1% over the past week, with equity models down 0.1% WoW, rates down 0.4% WoW, and FX unchanged WoW.
• FX momentum models are the best-performing over a three-month timeframe (+0.6%).

Market Implications

• Momentum models have become less bearish US 5-year and 10-year maturities – Dominique still expects no Fed cuts in 2024, highlighting a recent Fed report on shelter inflation as additional evidence supporting her view.

Latest Signals

Equity momentum model signals have shifted slightly over the past week. The S&P 500 signal remains very bullish, the Nikkei and DAX signals have flipped from slightly bearish to slightly bullish, and the FTSE bias remains mildly bullish (Chart 1).

Rates momentum models are very bearish across the board – except for UK gilts, where the signal has flipped from very bearish to slightly bullish. All other contracts are slightly bearish, in many cases less bearish than the preceding week. Dominique writes that the FOMC consensus on greater inflation risks is stronger and maintains her conviction the Fed will not cut rates this year.

Turning to FX, momentum models’ views have shifted slightly – they have flipped from very bullish to slightly bearish GBP/USD, very bullish to slightly bearish EUR/CHF, slightly bearish to slightly bullish AUD/USD, and very bearish to slightly bearish NZD/USD. All other biases remain unchanged, with EUR/USD still very bearish and USD/JPY still very bullish. We outline a buy-on-dips case for USD/JPY, and advocate patience before fading recent EUR/CHF weakness and initiating longs.

Model Performance

Momentum models were down 0.1% over the past week, with equity models down 0.1% WoW, rates down 0.4% WoW, and FX unchanged WoW.

(Charts 1 and 2: blue bar is last week’s signal; orange bar is this week’s signal.)

(Charts 3 to 5: orange bars are average returns of CTA model over past three months by asset, black dot is change over the past week).

*The basic strategy is to use returns (lookback windows) to give buy/sell signals. So, if the US stocks are up over the past three months, you buy, otherwise, you sell (note I use excess returns).

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Richard Jones writes about FX and rates markets for Macro Hive. He has traded and invested in interest rate and FX market portfolios spanning three decades, both on the buy-side and sell-side.

(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.)