For years it paid to buy whatever was going up and bet against whatever was going down. The strategy has a name, momentum, and a whole industry behind it: quant funds, thematic baskets, leveraged funds, options. The S&P 500 Momentum Index rose 44% in the second quarter — the best quarter it has ever had — and 133% over five years, nearly double the broad market.
Since July 1 it is down more than 9% while the S&P 500 has gained 2.8%. It is on track for its biggest quarterly underperformance in 25 years. July was the second-worst month for the trade in about four decades, according to Bank of America; the only worse one was April 2009.
What broke it
Crowding, mostly. Goldman Sachs says the basket of stocks hedge funds like most posted its biggest monthly underperformance relative to the S&P 500 in more than 20 years. On August 19, the worst day for systematic long-short managers in over two years, half the losses came from momentum bets. Moderna — one of the most shorted stocks around — rose more than 150% in August after its cancer vaccine with Merck worked, and every fund that was short it paid. A hedge fund called Situational Awareness, which had piled into chip stocks, melted down.
“It is a little bit like Cinderella and the clock striking midnight,” one San Francisco money manager told the Journal. “They don’t send a memo around telling you when the capex cycle is over.” Some speculators have now flipped: net short positions in Nasdaq-100 futures are near their highest in two decades.
What quietly worked
Heard on the Street put the other half of the story on the same page. The S&P 500 Equal Weight Index — every company at 0.2%, rebalanced every quarter, selling winners and buying laggards by construction — is up 16.3% this year against 13.5% for the ordinary index. The equal-weight Nasdaq-100 is up 20.2% against 17.1%. The equal-weight Russell 1000 is up 17.8% against 13.4%.
| Index, year to date | Equal weight | Cap weight |
|---|---|---|
| S&P 500 | +16.3% | +13.5% |
| Nasdaq-100 | +20.2% | +17.1% |
| Russell 1000 | +17.8% | +13.4% |
The reason is not clever. Tesla and Microsoft have lagged; SpaceX joined the Nasdaq-100 at a $1.9 trillion market value and underperformed it. When the biggest names stall, the fund that refuses to overweight them wins. The price is a higher expense ratio — about 20 basis points against as little as three — and, in the years the giants run, a smaller return.
The planning point
Momentum is a strategy that works until the day it does not, and the day it does not tends to be one day. Equal weight is a strategy that never wins the year and rarely loses it badly. Most retirement money belongs closer to the second than the first, and this quarter is the reminder of why.