Tagged: momentum

Growth vs Value

Are you Value or Growth?  

Depends what we mean, I know. S&P Dow Jones says it distinguishes Value with “ratios of book value, earnings and sales to price.”

It matters because Growth is terrorizing Value.  According to data from the investment arm of AllianceBernstein, Growth stocks outperformed Value stocks by 92% between 2015-2020.  Morningstar says it’s the biggest maw on record, topping the 1999 chasm.

If you’re in the Growth group, you’re loving it.  But realize.  By S&P Dow Jones’s measures, anybody could be a Value or Growth stock at any time.  It’s all in the metrics.

The larger question is why the difference?  AllianceBernstein notes that the traditional explanation is earnings growth plus dividends paid.  That is, if your stock is up 50% more than a peer’s, it should be because your earnings and dividends are 50% better.

If that were the case, everybody would be a great stock-picker. All you’d need do is buy stocks with the best earnings growth. 

Well, turns out fundamentals accounted for just ten percentage points of the difference.  The remaining 82% of the spread, as the image here from AllianceBernstein shows, was multiple-expansion.  Paying more for the same thing.

Courtesy AllianceBernstein LP. https://www.alliancebernstein.com/corporate/en/insights/investment-insights/whats-behind-the-value-growth-performance-gap.html

Put differently, 90% of the time Growth stocks outperform Value stocks for no known reason. No wonder stock-picking is hard.

Take Vertex (VRTX) and Fortinet (FTNT), among the two very best and worst stocks of the past year.  I don’t know fundamentally what separates them. One is Tech, the other Healthcare.

I do know that running supply/demand math on the two, there’s a staggering behavioral difference.  FTNT spent 61 days the past year at 10.0 on our ten-point scale measuring demand called Market Structure Sentiment.  It pegged the speedometer 24% of the time.

VRTX spent five days at 10.0.  Two percent of the time.  You need momentum in today’s stock market or you become a Value stock.

We recently shared data with a client who wondered why there was a 20-point spread to the price of a top peer.  We ran the data.  Engagement scores were about the same – 85% to 83%, advantage to our client. Can’t say it’s story then.

But the peer had a 20% advantage in time spent at 10.0.  The behavioral patterns were momentum-style. Our client’s, GARP/Value style.

Okay, Quast.  Suppose I stipulate to the validity of your measure of supply and demand, whatever it is.  Doesn’t answer the question. Why do some stocks become momentum, propelling Growth to a giant advantage over Value?

I think it’s three things. I can offer at least some data, empirical or circumstantial, to support each.

Let’s call the first Herd Behavior.  The explosion of Exchange Traded Funds concentrates herd behavior by using stocks as continuously stepped-up collateral for ETF shares.  I’ll translate.  ETFs don’t invest in stocks, per se.  ETFs trade baskets of ETF shares for baskets of stocks (cash too but let’s keep it simple here). As the stocks go up in value, ETF sponsors can trade them out for ETF shares. Say those ETF shares are value funds.

The supply of Value ETF shares shrinks because there’s less interest in Value.  Then the ETF sponsor asks for the same stocks back to create more Growth ETF shares.

But the taxes are washed out via this process. And more ETF shares are created.  And ETFs pay no commissions on these transactions. They sidestep taxes and commissions and keep gains.  It’s wholly up to traders and market-makers to see that ETF shares track the benchmark or basket.

The point? It leads to herd behavior. The process repeats. Demand for the same stuff is unremitting.  We see it in creation/redemption data for ETFs from the Investment Company Institute. ETF creations and redemptions average over $500 billion monthly. Same stuff, over and over. Herd behavior.

Second, there’s Amplification.  Fast Traders, firms like Infinium, GTS, Tower Research, Hudson River Trading, Quantlab, Jane Street, Two Sigma, Citadel Securities and others amplify price-moves.  Momentum derives from faster price-changes, and Fast Traders feed it.

Third is Leverage with derivatives or borrowing.  Almost 19% of trading volume in the S&P 500 ties to puts, calls and other forms of taking or managing risk with derivatives. Or it can be borrowed money. Or 2-3x levered ETFs. The greater the pool of money using leverage, the larger the probability of outsized moves.

Summarizing, Growth beats Value because of herd behavior, amplification of price-changes, and leverage.

By the way, we can measure these factors behind your price and volume – anybody in the US national market system.

Does that mean the Growth advantage is permanent?  Well, until it isn’t. Economist Herb Stein (Ben’s dad) famously said, “If something cannot last forever, it will stop.”

And it will. I don’t know when. I do know that the turn will prompt the collapse of leverage and the vanishing of amplification. Then Growth stocks will become Value stocks.

And we’ll start again.

Blurry

As Thanksgiving nears, we’re giving thanks for a rock-star stock market since last December, when it fell 20%. Can it hold?

In the simplest sense, whatever has been driving it must continue. Thanksgiving is to me the best holiday because it’s introspective. So let’s reflect on what’s behind stocks.

Everyone says corporate earnings, the economy, monetary policy.  The US economy is strong.  Earnings though are weaker the past three quarters than comparable earlier periods, so it’s not that. Monetary policy is easy, which helps by fueling leverage.

Buybacks?  Sure, a contributor. Geopolitics, trade deals, tariffs?  You’d think those might be headwinds. So far, no. Remember, news doesn’t buy or sell stocks. People and machines do.

Fund-flows? Research from Ed Yardeni says bonds have benefited while stocks have suffered. Domestic trends are disturbing – steep declines for years (See Figure 5) as money steadily shifts toward bonds and foreign equities.

Along our path of reflection we come to market structure – and why both companies and investors should learn it. Between Jul 1, 2015 and present there are 1,097 trading days. Of those, 589 are between 4.5-6.0 on ModernIR’s 10-point Market Structure Sentiment buy/sell scale.

Do the math. The ratio (589/1097) is 5.4/10.0. Reads over 5.0 mean machines will lift prices.  It’s a GARP market – growth at a reasonable price.

Now let’s add in the time the market has spent in “Overbought” territory, above 6.0. It’s 301 days, or 27% of the time. It’s been Oversold (below 4.5) 207 days, 19%.

There’s our answer. It’s GARP 54% of the time, momentum 27% of the time, value 19% of the time. It’s more growth than value, more buying than selling.  Whether money comes or goes, if what comes is disposed to pay up, stocks rise.

Contrast with Sep-Dec 2018. During that period when stocks fell about 20%, they were Oversold 44% of the time and Overbought just 16% of the time.

Narrow the data to 2019 and stocks are GARP just 44% of the time, Overbought 39% of the time. It’s become momentum almost as much as growth.

Zoom on Aug 1-present. GARP behavior is down to 41% of trading, Overbought, 36% of the time, Oversold 23% of the time.

Shouldn’t we be measuring that? By sector, industry, stock? Well. We do, at ModernIR.

Shifting our lens, in the past three weeks across the eleven market sectors, selling has outpaced buying 61% to 39%.

How does money leave stocks while the market sustains GARP or momentum (more Overbought than Oversold) characteristics?

The money behind prices is increasingly short-term, and leveraged. Add up everything that’s not long-only investing and it’s 86% of trading. The AMOUNT of money chasing stocks can shrink and stocks will still rise because the TIME dedicated to buying or selling is increasingly up-or-down, not buy-and hold.

Lesson? Public companies and investors, you cannot count on fundamentals, macroeconomics, central banks, to predict what the market will do. It moves in response to its temporal behavioral biases.

Or put another way, direction hinges on the short-term propensity of money to plow back into stocks tomorrow or to stop doing that.  It shifts to GARP, to growth, to value, and back. When the bias in the data blurs, money falters.

Data are getting blurry (as rock band Puddle of Mudd would say). It’s not a GARP market anymore.

For that reason, I’ll go out on a limb and say it’s too early to call this a record year (like Eric Church, for you country fans).  What got us here has begun eroding. We’re only 1% above the GARP levels for stocks in Q4 2018.

Wrapping up, it’s a great season, this one of Thanksgiving.  Give thanks!  And be alert to changing behaviors.  When lines blur – in your stock, your peers, your sector, industry – you should know. It’s a weather report on what’s coming. We want to stay clear-eyed.

Rotation

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.