Tokyo based, expat Cape Bretoner. Learning to live in a de-leveraging world. Better suited to the crusades. CFA & FRM charter holder. Disclaimer: @Firehorsecaper reminds investors to always perform their own due diligence on any investment, and to consult their own financial adviser or representative when warranted. Any material provided is intended as general information only, and should not be considered or relied upon as a formal investment recommendation.
Joined Jun 23, 2015
89 Blog Posts


Note: MTUM: iShares MSCI USA Momentum Factor ETF (monthly returns, incl. dividends).

MTUM has $10.5bln in AUM (0.15% expense ratio). The average P/E is 31 and P/B 6.24. The top 10 momentum names owned by the ETF carry a 42% weighting in aggregate; AMZN, MSFT, VISA, BOEING, MASTERCARD, JP MORGAN, CISCO, NETFLIX, INTEL & ADOBE. The annualized vol of $MTUM is 15.6% vs. a compressed 12.5% for the S&P (87″ S&P index vol spiked to 50, 2008 > 62). S&P correlation is +0.95 as one would expect.

This graph is one all investors should heed this week. Black Monday is soon upon us, an ominous anniversary. Momentum investing has had a great run, as the graph reflects, but the blade has 2 edges, as investors are finding out. We kissed the 200 day m.a. like Joe Biden, with intent. This week, all eyes are on the heartless bots, ready to sell indiscriminately if/when the key technical level is breached decisively. $SPY ETF is the big dog, $280 billion in AUM (0.28 trillion). SPY monthly returns through October 18, 2018 are much less extreme at the margin, but note in the Feb. 2018 market hiccup MTUM outperformed SPY:

Note: SPY: SPDR S&P 500 Index ETF (monthly returns, incl. dividends).

If you are going to panic, panic 1st. There is a great deal of AUM managed via momentum metrics at present (sitting somewhere between traditional active and passive management). Backtests reflect outperformance based on side-stepping the big drawdowns in the equity market; the decision factors can be tweaked but a standard weighting is 40% on 3 mth returns, 30% on 20 day returns and 30% on 20 day volatility. Risk assets are sold in favor of ETFs like SHY (Barclay’s Low Duration Treasury, 2-yr) that will hold in should the market continue to plummet into the bowels of hell. It is all very methodical, “Jesus take the wheel” kind of stuff and risk assets are not entertained until the model says to (on a decided turn for the better in terms of observed performance). There will be little sign of rotation, EM (China, Russia, Brazil, India, Indonesia ….) don’t make me laugh. EEM, the biggest emerging markets ETF has AUM of $30bln.

Note: EEM: iShares MSCI Emerging Markets (monthly returns, incl. dividends).

This is a binary risk on/risk off allocation decision. Think light switch. The lights go off. Downside volume has been outstripping upside by as much as 40% in cruel October 2018 so far, but it could be just throttle steering so far.

We are all aware of the macro factors that got us to this precipice. Italy, China-USA relations, hard(er) Brexit, Fed rate hike cycle (US Dollar strength), QE unwind, Saudi fight club, and mid-term elections in the USA.

Buckle up. Keep your wits about you. JCG

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  1. firehorsecaper

    3 trading days in since I penned this piece, Nasdaq is 11.4% off the highs and S&P 9%. Exactly to script, but not positioned for the ferocity of the swoon.

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