ab6 February 2024Global Research and Evidence LabUS Equity Derivatives StrategyWe are never getting back together: What could break the momentum trade?Trade ideas to consider:Riding the momentum: ARKK/QQQ Jun 25-delta put switches (buying ARKK puts; ~2:1 QQQ:ARKK beta-adjusted sizing)Bucking the momentum: LQD/HYG Jun 25-delta call switches (buying LQD calls, ~2:1 HYG:LQD duration-adjusted sizing)Good is good… is good?: Market warming up to idea of resilient economic data over rate cut relianceThe strong market reaction off the back of Friday's stronger-than-expected NFP report told us two things: (1) the market is warming up to the idea that 'good is, in fact, good', and perhaps less reliant on rate cuts, but (2) low Quality not catching a bid suggests the momentum trade is not over yet (Figure 1). As we have been highlighting, the chase to price in (and more recently, price out) rate cuts has led to Quality, Size, and Beta factors all trading in lockstep with rates (Figure 2). This is a relationship we see persisting in the near-term, particularly as (1) direction of rates continues to drive the narrative, and (2) the impact from higher yields continues to weigh on lower Quality pockets of the market.The question then becomes: What breaks up this relationship? More on next page...Figure 1: Market remains firmly in 'good is good' territory, though this has yet to spur a second leg higher in low QualitySVB collapse-8%-6%-4%-2%0%2%4%6%8%10%-80%-60%-40%-20%0%20%40%60%80%Feb-22May-22Aug-22Nov-22Feb-23May-23Aug-23Nov-23Feb-24CESI vs. SPX Corr (Rolling 1m Daily)DJ Market-Neutral Quality (% m/m; RHS)Good news is good news/Bad news is bad newsGood news is bad news/Bad news is good newsSource: Bloomberg, UBSFigure 2: Chasing the Fed pivot has garnered a notable momentum trade – Quality, Size, and Beta have all traded in tandem with rates over the last 6+ months9095100105110115120Aug-23Sep-23Oct-23Nov-23Dec-23Jan-24Feb-24Quality (Hi/Lo)Beta (Lo/Hi)Size (Lg/Sm)Momentum (Hi/Lo)10y UST Yield (Rebased)Source: Bloomberg, UBS; Cumulative relative performance rebased to 100This report has been prepared by UBS Securities LLC. ANALYST CERTIFICATION AND REQUIRED DISCLOSURES, including information on the Quantitative Research Review published by UBS, begin on page 6. Global StrategyAmericasMaxwell Grinacoff, CFAStrategist maxwell.grinacoff@ubs.com +1-212-713 3892Gerry FowlerStrategist gerry.fowler@ubs.com +44-20-7567 5490Artour DanilovStrategist artour.danilov@ubs.com +44-20-7567 5203 US Equity Derivatives Strategy 6 February 2024ab 2Momo FOMO: A quick history of MomentumThe Momentum factor is one of the most simple yet complex and dynamic factors in an investor's toolkit. Simple in concept, as it is often based solely on trailing 52w return; More powerful than it sounds, in that it not only reflects the prevailing regime, but the strength of conviction in that regime, and ultimate...
