Quants Chasing Momentum Get New Quarter, Same Results

(Bloomberg) -- Trend-following momentum stocks are starting the second quarter the same way they ended the first -- with little momentum.

The iShares Edge MSCI USA Momentum Factor ETF, ticker MTUM, fell 3.2 percent Monday, more than the 2.2 percent decline in the S&P 500 Index. It's the exchange-traded fund's seventh drop of more than 2 percent in a single day this year. In 2017, a loss of that magnitude never happened.

“[Momentum] was the strongest part of the market for the last two to three years -- now they're the weakest part,” said Paul Nolte, a portfolio manager at Kingsview Asset Management in Chicago.

Though President Donald Trump's renewed criticism and tweets about Amazon.com Inc. may be adding to the pressure, the overall weakness in the quant trade shows the declines aren't just coming from technology darlings. In the BlackRock Inc. ETF, which tracks stocks that performed the best over the past six to 12 months, Alnylam Pharmaceuticals Inc. was the biggest laggard Monday afternoon followed by Live Nation Entertainment Inc.

Strategists from Morgan Stanley to Lazard Asset Management Ltd. have recently stoked worries about the momentum strategy. Evercore ISI's Dennis Debusschere believes the weakness should continue into the second quarter for a variety of reasons.

“The performance of earnings momentum relative to relative value has reached an extremely high level (90% percentile), which suggests increased risk to momentum,” he wrote in a note to clients Monday. “Technology, the sector most exposed to Momentum is still more than 25% of the S&P market cap, and we have seen the market cap of FAANG stumble toward the end of March. All of the above suggest the performance of Momentum will struggle in 2Q18.”

Analysts at S&P Dow Jones Indices also expressed concern Monday. Momentum can suffer higher drawdowns in risk than other quant trades, they wrote in a report, since so-called momentum-chasers often run for the exits in changing environments.

“[Momentum] currently is the most concentrated of any of the included indices, with strong biases toward large cap, high beta, and technology stocks,” they wrote. “Accordingly, momentum may suffer if the recent weakness in large-cap technology stocks continues. Either way, it might prove insightful to keep a close eye on its performance.”

To contact the reporter on this story: Sarah Ponczek in New York at sponczek2@bloomberg.net.

To contact the editors responsible for this story: Jeremy Herron at jherron8@bloomberg.net, Eric J. Weiner, Randall Jensen

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