【ETF Trends】Signs of Value Tilt? (2)

Recap

In the last episode, my standing question was whether the overturn in weekly performance of winners and losers could be a signal for a value tilt and potentially the momentum crash. In particular, biotechnology and pharmaceutical companies that appeared resistant to COVID-19 situation, began to divert from other sectors. One week since, there has been a couple of notable developments.

2020/05/28 - [Trends/Weekly Briefing] - Sector & Factor Trends (1) :: Sign of Value Tilt?

Sector Trends

As discussed in the last episode, the outperformance of the sectors that experienced massive sell-offs were rebounded, while sectors that appeared resistant to the COVID-19 situation either overturned or remained relatively flat. 

Winners (in the order of)

Airlines

Aerospace & Defense

Financial

Real Estate

Industrial

Materials

Utilities

Energy

Losers

Gold Miners

Biotech

Health Care

Flat

Internet

Technology

Communications

The most notable piece is the overturn of GDX (VanEck Gold Miners Equity ETF), primarily depressed by market consensus that Gold is overpriced. Between March and April of 2020, the contemporaneous divergence in price of gold and silver resulted Gold-Silverratio to peak 126.43 (March 18, 2020). According to Forbes and Marshall Gittler, head of investment research at BDSwiss, this was the highest it's been in the last 5,120 years. While these sources could not identify the exact cause of such inflated ratio, but implied potential mean reversion in the next coming weeks. As suggested, gold and silver converged, dropping the ratio down to 96 to date. I will explore the history and trends of gold and other precious materials in a separate series.

Factor Trends

Now, the real deal. Momentum factor began to underperform, while value factor is doing exceedingly well. This is very interesting in that QQQ is marginally off the previous high (potential resistance) from last February, and FANG+ stocks have long cross their previous highs. With large-cap growth stocks pushing market capitalization weighted indexes disproportionately when compared to the equal-weighted such as DJI, there is a significant room for market capitalization weighted indexes to see an adjustment, while small- or mid-cap stocks continue their value reversion.

On a yield-to-date basis, QQQ is followed by VUG (Growth Factor), MTUM (Momentum Factor), VBK (Small-Cap Growth Factors), and VV (Large-Cap Size Factor).

Over the last two weeks (with vertical line representing May 20, 2020 mentioned in the last episode), all of the aforementioned ETFs underperformed relatively to:

OUTPERFORMERS (Trailing 2 Weeks)

VBR (Small-Cap Value)

XSMO (Small-Cap Momentum)

VB (Small-Cap)

VOE (Mid-Cap Value)

RSP (S&P Equal Weight)

Takeaways

These observations suggest that the upward trend in size factor, particularly small-cap, is arising, along with a rotation from growth and momentum factors into value factor. Also, the fact that large-cap momentum is underperforming versus the market implies market-cap weighted indexes are likely to underperform relative to equal weighted indexes. Much of these evidences appear to be in line with the development of momentum crash, which will be discussed in depth in a separate post.