Factor Momentum: Value, Value, Value!

And my best guess, this will stay...

I stay long small cap value momentum with a 36% short position on the Russel 2000.

Here is the why:

So, everybody is bearish now.

Yep, it’s not a stellar market, but it’s not super terrible too.

Some weeks ago, on a day like these short systems would have spiked much more! They barely moved yesterday —>

Small cap value momentum (here against the Russell 2000) still extremely, extremely strong:

Micro caps (against the SPY) same thing, if we would be in real trouble, they would show relative weakness, but they do not —>

Mega Cap high beta, starts to look constructive:

Is this a go, go goldilocks market? No!

Is this a crash prone (-30 -50% market)? I do not think so.

We are in a market we have not seen in a while. It looks more and more like 2000-2003 to me with the difference that the index components of the Nasdaq is much better than 2000.

So yes, if you count on stocks with no earnings and high valuations, this market is bad. Another 90% down from here for a lot of names, while indices will do better then from 2000-2003 because they have a better composition (Russel 2000 the worst by the way, those are not small caps, but mid caps now and a ton of trash besides the regional banks).

But stocks with a price to cash flow below 5?

The tape has pockets of strength: Value will outperform from here and this strength will stay.

This perfectly makes sense, Inflation will be higher the next 5-10 years than from 2010-2020 and that favors value, value + growth and growth at reasonable price.

Cot readings are better and the DIX / GEX is in a territory which is unseen since March 2020!

Backtests:

If you have a model, that only back-tests the last 20 Years, I think you are in big trouble.

Yes, there was a shift after Long Term Capital Management crash, but what if we have a similar shift in another direction now too? (My take is the fed will fight inflation hard, political pressure will be huge, and the fed goes with the Zeitgeist.)

Good back-test go back more than 100 Years and have been confirmed independently by 100s of academics.

Stuff like momentum (stock, sector, industry), size, low volume, factor momentum, EPS revisions have been back tested much longer than 20 Years, very often 100 years, sometimes back to the 1600s!

Now the talk about Quad4 and deflation. Yes, we will have one, but everybody knows it!

Only the ROC component will be negative, not GDP and Inflation by itself. So it is a shallow one! It’s a cynical downturn in a bull market, otherwise it would be not shallow but deep (ROC Component and absolute component negative, that would be the case if inflation would go below 0 (very unlikely!) and GDP below 0 too (very unlikely too).

What I see is that a ton of people telling me this is a crash prone market. Yes, for high beta, high valuation trash.

The tape changed, we change with it!