Market Momentum’s Not Recovering

It’s no secret that the giddy momentum that drove the equity market higher for four years has evaporated. If you looked at the price action (see Chart 1) of the QuantShares U.S. Market Neutral Momentum ETF (NYSE Arca: MOM), you’d see its September 2015 peak has been followed by months of range-bound trading. ’Til now, that is.  

MOM tracks an index compiled by S&P Dow Jones that represents the spread return between high- and low-momentum stocks. Issues exhibiting the highest degree of momentum are bought in the portfolio while those with the lowest momentum are shorted. Market and dollar neutrality is achieved by equally weighting the long and short legs within each sector. The investment objective of the fund is to isolate each stock’s momentum from that of the broader market. And, to a certain extent, the strategem’s worked. MOM has slipped only 3.1 percent since the top of the year while the S&P 500’s declined 4.5 percent.

The ETF’s disengagement with the broad equity market, however, has worked against it in February. MOM’s share price has broken down despite the S&P 500’s rally off its January lows, a signal of the rebound’s lack of breadth.  

Indeed, if you plot an index (Chart 2) of MOM’s price against that of its stablemate, the QuantShares U.S. Market Neutral Value ETF (NYSE Arca: CHEP), you’ll see the threat to a yearlong uptrend line. CHEP is another long/short index tracker in which undervalued stocks—those issues with below-average earnings- and book-to-price ratios—are bought at the same time overvalued equities are shorted.

Essentially, MOM is losing ground to CHEP as investors pull in their horns and become more defensive. CHEP is actually up 2.6 percent year to date, but that’s no reason to go out and buy the fund. From the looks of things, it’s probably better to short MOM. Near term, there’s likely to be a dollar of downside still in MOM shares.