There’s a story going around about an epochal rotation from momentum (growth) to value in stocks. It may be a hoax.
I’ll explain in a bit. First the facts. It began Monday when without warning the iShares Edge MSCI USA Value Factor ETF (VLUE) veered dramatically up and away from the iShares Edge MSCI USA Momentum Factor ETF (MTUM).
CNBC said of Monday trading, “Data compiled by Bespoke Investment Group showed this was momentum’s worst daily performance relative to value since its inception in early 2013.”
The story added, “The worst performing stocks of 2019 outperformed on Monday while the year’s biggest advancers lagged, according to SentimenTrader. This year’s worst performers rose 3.5% on Monday while 2019’s biggest advancers slid 1.4%, the research firm said.”
A tweet from SentimenTrader called it “the biggest 1-day momentum shift since 2009.”
It appeared to continue yesterday. We think one stock caused it all.
Our view reflects a theorem we’ve posited before about the unintended consequences of a market crammed full of Exchange Traded Funds, substitutes for stocks that depend for prices on the prices of stocks they’re supposed to track.
To be fair, the data the past week are curious. We sent a note to clients Monday before the open. Excerpt:
“Maybe all the data is about to let loose. It’s just. Strange. Fast Trading leading. ETFs more volatile than stocks. Spreads evaporating. Sentiment stuck in neutral. More sectors sold than bought….Stocks should rise. But it’s a weird stretch ahead of options-expirations Sep 18-20. It feels like the market is traversing a causeway.”
That stuff put together could mean rotation, I suppose.
But if there was a massive asset shift from growth to value, we’d see it in behavioral change. We don’t. The only behavior increasing in September so far is Fast Trading – machines exploiting how prices change.
What if it was AT&T and Elliott Management causing it?
If you missed the news, T learned last weekend that Activist investor Elliott Management had acquired a $3.2 billion stake in the communications behemoth and saw a future valuation near $60. On that word, T surged Monday to a 52-week high.
T is the largest component of the MSCI index the value ETF VLUE tracks, making up about 10% of its value. ETFs, as I said above, have been more volatile than stocks.
Compare the components of MTUM and VLUE and they’re shades apart. Where T is paired with VLUE, CMCSA ties to MTUM, as does DIS. MRK is momentum, PFE is value. CSCO momentum, INTC, IBM value. PYPL, V, MA momentum, BAC, C, value.
Look at the market. What stuff did well, which did poorly?
The outlier is T. It’s a colossus among miniatures. It trades 100,000 times daily, a billion dollars of volume, and it’s been 50% short for months, with volatility 50% less than the broad market, and Passive Investment over 20% greater in T than the broad market.
T blasted above $38 Monday on a spectacular lightning bolt of…Fast Trading. The same behavior leading the whole market. Not investment. No asset-shift.
What if machines, which cannot comprehend what they read like humans can, despite advances in machine-learning, artificial intelligence (no learning or intelligence is possible without human inputs – we’re in this business and we know), improperly “learned” a shift from growth to value solely from T – and spread it like a virus?
Humans may be caught up in the machine frenzy, concluding you gotta be in value now, not realizing there’s almost no difference between growth and value in the subject stocks.
Compare the top ten “holdings” of each ETF. Easy to find. Holdings, by the way, may not reflect what these ETFs own at a given time. Prospectuses offer wide leeway.
But let’s give them the benefit of the doubt. What’s the difference between MRK and PFE? V, MA, and PYPL and C, BAC and, what, GM and DIS?
Stock pickers know the difference, sure. Machines don’t. Sponsors of ETFs wanting good collateral don’t. Except, of course, that cheap collateral is better than expensive collateral, because it’s more likely to produce a return.
Such as: All the worst-performing stocks jumped. All the best-performing stocks didn’t.
What if this epochal rotation is nothing more than news of Elliott’s stake in T pushing a domino forward, which dropped onto some algorithm, that tugged a string, which plucked a harp note that caused fast-trading algorithms to buy value and sell momentum?
This is a risk with ETFs. You can’t trust signs of rotation.
We have the data to keep you from being fooled by machine-learning.