Tuesday saw high momentum names cool off while laggards shined.
Tuesday was a very poor day for momentum strategies. Not only did the leaders struggle, but the laggards also had a fantastic day. One way we can quantify this is by looking at baskets of stocks separated by momentum. For today, we’ll use five baskets, or quintiles, to gauge how the leaders (quintile 5) performed against the laggards (quintile 1). Tuesday, the spread between the leader basket and laggard basket was -3.84%. This is quite a change given how well momentum has done recently, specifically in the second quarter when the top momentum quintile gained 11.76% while the bottom momentum quintile gained 5.26%. Nonetheless, the big single-day outperformance by the laggards is notable and raises concerns of a rotation underneath the surface.
Historically, forward returns for momentum and the broad market are suboptimal following such a weak day for momentum stocks. Using the iShares MSCI USA Momentum Factor ETF (MTUM) as a momentum representative and the S&P 500 Index (SPX) as a broad market representative, the table below shows forward returns for each following equal to or worse single days for momentum, excluding clusters within six months. Many occurrences took place in the early 2000s and during the GFC which heavily contributes to the lower average and median forward returns for both benchmarks. However, since 2010, the forward returns have been noticeably better for both MTUM and SPX.
The last three occurrences did lead to some weaker market environments for either the market or momentum strategies. February 2021 was the start of a major rotation and momentum struggled while the S&P 500 did quite well moving forward. Next, August 2022 ended up being a short-term top for the S&P 500 while MTUM shined on a relative basis over the next six months. Most recently, late January 2025 led to a nearly 20% decline before recovering to all-time highs for both SPX and MTUM. All in all, it’s not a great look for the market when looking at the last few occurrences. However, until we see more technical evidence of deterioration, there is not much to suggest a major change is underway. If there is anything to be taken from this data, then it’s that the high-flying momentum names may regress over the next few months, so be mindful when initiating new positions, especially those trading in heavily overbought territory.
