Nomura: Why September Sets-Up For Potential “Monster” Stock, Momentum Rally

By Charlie McElligott, head of cross-asset strategy at Nomura

WHY SEPTEMBER SETS-UP FOR A POTENTIAL MONSTER EQUITIES/LARGE ‘MOMENTUM’ RALLY

We correctly advocated a powerful “1Y Momentum Reversal” in April—along with the ensuing “snapback” in May—based on seasonal tendencies which happened to align with my idiosyncratic observations on “crowded” sector-, thematic- and factor- trends at the time which were ripe to “mean revert” as the macro regime too was “pivoting”

Over the past week, I have “teased” a tactical “Long U.S. Equities ‘1Y Momentum’ Factor” trade view for the month September—again noting the powerful seasonality, but with additional factors

Since 1984, September on average posts the 2nd best monthly return for the “1Y Momentum” factor strategy of any month—in particular, it’s the “short 1Y Momentum shorts” which drive the large performance, as laggards come under meaningful pressure, and thus contribute effectively the entirety of a market-neutral “Momentum” strategy’s gain

Why does this phenomenon occur?  My simple rationale is as follows:

  • Studies on “Momentum” factor seasonality have long-shown that the quarter-end months of June, September and December (not March, FWIW) show outsized returns, as since 1984, those particular months post three of the four best average monthly performances for “Momentum” mkt neutral strategies
  • September is also the quarter-end month which overlaps with many Mutual Fund “Year Ends” (alongside Oct)—this in-turn drives outsized “tax loss” selling, or behavior where institutional investors abandon “losers” to avoid reporting “embarrassing” ownership of said “loser” stock picks
  • In addition, you too will see elements of “mark-ups” / “window-dressing,” where PMs will buy “winners” to create the appearance that they have captured alpha and found the “right” stocks over the quarter

Net / Net, this creates an additional “momentum impulse” as the “biggest losers” (a.k.a. “Momentum Shorts”) receive a “boost” of artificial “mark-down,” while the “biggest winners” (a.k.a. “Momentum Longs”) too may receive an artificial “boost” from “window-dressing”

IN ADDITION to the “Momentum” seasonality, it also makes sense that in light of this current aforementioned bout of “extreme” fund performance issues (short books squeezing so violently that it is bleeding into long selling / “gross-down” behavior) that the timing of this transition has created an additional “attractive entry point” for a “Momentum” reversal (higher)—especially as the SPX makes new all-time highs against this “performance anxiety”

Also as previously noted, the past 10 years shows a powerful ‘upswing’ in U.S. Economic Surprise Index from mid-August through end of year (chart below)

All-in, this sets the table for what I believe could be a “grab” month in U.S. Equities through the month of September and into mid-to-late October; HOWEVER, this then leads to an “overshoot” potential once folks have taken net exposures back significantly higher, as my view has continued to be that by late-October, we should again see heightened cross-asset volatility off the back of negative impact of what will be a large “Quantitative Tightening” impulse via the Fed / ECB / BoJ in this window.

U.S. EQUITIES “1Y MOMENTUM” SEASONAL PERFORMANCE—1984 TO PRESENT:


Source: Nomura

“1Y MOMENTUM SHORT” LEG SEASONALITY, IN PARTICULAR:


Source: Nomura

CURRENT NOMURA ‘1Y MOMENTUM SHORT’ LEG COMPOSITION:


Source: Nomura / Instinet

CURRENT NOMURA ‘1Y MOMENTUM LONG’ LEG COMPOSITION:


Source: Nomura / Instinet

U.S. ECONOMIC SURPRISE INDEX SEASONALITY, PAST 10Y:


Source: Bloomberg

THEN…THE ‘QE TO QT’ HANGOVER:

IN PARTICULAR, A VERY HEAVY SOMA RUN-OFF LATE OCT / NOV:

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Author: Tyler Durden