Trend Analysis Using ETFs, P3 – Momentum

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This is the third installment of the ETF series. The goal is to study and use ETFs based on Russell family of indices to analyze historic and emerging trends and rotations. So far we have covered ETFs based on segmented by market-caps, and then using Value and Growth factors across.

Almost 50% of Russell 1000 companies and about 62% of SP500 companies have released Q1, 2021 earnings. The records have been stellar but the stock market refuses to react to the positive news. Analyzing the IWB ETF we can see that so far Russell 1000 companies have registered 26.73% positive Earnings Surprise and almost 53% YoY Earnings growth.


But we don’t see that reflected in the stock market. And market participants are eagerly watching every macro indicator for signs of inflation, reopening acceleration or weakness, vaccination status for clues. The biggest risk seem to be inflation with rising interest rates and/or hiccup in the reopening story. The market is fearful of a correction. The rationale being inflation could spike the interest rates resulting in institutional investment leaving equities, the resulting drop would in turn spook the retail investors who would take their profits and run.

The question is: can we see slowing and reversing of momentum in the corresponding ETF – SPDR Russell 1000 Momentum Focus ETF – the ONEO? Below charts show several different Momentum ETFs. Chart 2 shows ONEO (orange) year-to-date performance compared to MTUM which is large cap US momentum stocks and SPMO which is SP500 Momentum ETF. MTUM and SPMO are trending below the market line (white) as expected. But ONEO is floating above. Possible reason is that Russell 1000 includes about 600-800 mid-cap companies depending on your definition. We can isolate this by using XMMO (green) which is S&P Mid-cap 400 momentum ETF, as shown in Chart 3. This shows the reasoning is correct but it does not rise up to ONEO since it still represents fewer mid-cap stocks. Then addition of OMFS – Russell Small-cap 2000 Momentum ETF (dark green) in chart 4 completes the reopening momentum picture by leading on top of all momentum ETFs.

While the dip in MTUM and SPMO since April 26th warrants careful monitoring, and might flash warning signal of troubling times as the experts are forecasting. The 10-year US Treasury rates have been trending up since around that date. 


 


  

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