Short-term Reversal

The Short-term Momentum factor just experienced one of its worst declines


This Monday’s Weekly Factor Return post mentioned how extreme the key factor returns were. Here, we will dig deeper, with the use of some visual aids, particularly into the Short-term momentum factor within the Russell 2000.


Below is plot depicting how last week’s returns compare to all other weeks going back to 2000. The red dots indicate last week’s returns. The plot’s x-axis is limited to +/- 10% to reduce the impact of the most extreme outliers. Four of the five factor returns lie outside the “whiskers” of the boxplot, thus are deemed outliers.


R boxlplot of Medium- and Short-term momentum, Size, Value, and Value factors in Russell 2000

Source: S&P Global, Jackson Creek Investment Advisors


As a reminder, the term return and spread are used interchangeably. The return, or spread, is the difference between the average return of the top 10% (Decile 1) of stocks ranked on the individual factor and the average return of the bottom 10% (Decile 10) of stocks. Short-term momentum (STM) measures the performance over the previous four weeks. The top 10% of stocks with the greatest sector-relative outperformance over that span are ranked in the top decile (Decile 1). The next-best 10% are ranked in Decile 2…and so on, with the worst performers ranked in Decile 10.


Last week's STM spread ranks below the 1st percentile, meaning less than 1% of all weeks since 2000 have had lower STM spreads. There were only seven weeks over the last 1,193 where STM returns were more negative than last week. As we have mentioned in prior posts (First, Second, Third, Fourth) that show historical factor returns, each of those weeks occurred in times of great market volatility - March/April of 2020, 2000-1 Tech Bubble, and November 2008.


Table 1: Short-term Momentum
Top 8 negative return weeks
Table of top eight largest declines of Short-term momentum factor within Russell 2000

Source: S&P Global, Jackson Creek Investment Advisors


When STM is positive, recent outperformers continued to outperform, on average. The large negative spread indicates a sharp reversal of that trend. The stocks that had the greatest outperformance as of the beginning of last week, underperformed those that had previously done more poorly.


Column chart of Decile 1 and Decile 10 Short-term momentum factor for week ending November 11, 2022

Source: S&P Global, Jackson Creek Investment Advisors


The negative spread does not mean recent winners (Decile 1) had a negative return. They just did not perform as strongly as recent losers (Decile 10). The chart above is the individual returns of Decile 1 (STM.1) and Decile 10 of STM. The average return of Decile 1 was 2.45% and the average return of Decile 10 was 11.40%.


STM reversals are not rare, but they can be quite extreme and create performance challenges for those overexposed to this factor.

Back