Inside Markets — Momentum Factor Unwind

There have been 16 momentum factor unwinds greater than -8% since 2008 with an average peak-to-trough decline of -12%. The current momentum unwind that started (peak) in mid-November has now totaled -11.8%. Note the average 1-month return for the momentum factor after the unwind has been completed is only +5.4%.

We don’t spend a lot of time on seasonality, but the last two weeks February are typically the worst 2 weeks of any calendar year. The seasonally weak back half of February is attributed to fading inflows that are the strongest in January and early-February. The pullback that has already occurred has the S&P 500 (SPX) and Nasdaq 100 (NDX) approaching short-term oversold levels into a more favorable seasonal period that begins in mid-March.

Reasons to be optimistic? There are a few. 1) Bearish equity sentiment has reached extreme levels; 2) positioning has returned below neutral; 3) implied equity volatility has lifted but remains below elevated levels (VIX>22); 4) credit spreads have also risen but remain well below levels that align with a more challenging consumer backdrop (HY >425); 5) Ten-year inflation breakeven yields remain below the recent high of 2.5%.