Losing Momentum
At a Glance
The momentum trade, which has been a pivotal driver of equity markets, appears to be losing steam as we head into Q4 2023. Per the full note from J.P. Morgan, momentum dispersion is currently at its widest since 1990, indicating a potential shift in investor focus towards overlooked sectors. The MSCI USA Momentum Index experienced a notable 43% gain in just a few months but may signal that its robust performance is waning, urging traders to reassess their equities exposure amidst evolving market conditions.
Key Takeaways
- 01Momentum dispersion at the widest since 1990 suggests a potential shift towards undervalued sectors.
- 02The MSCI USA Momentum Index has seen a 43% gain from March to June, indicating initial strong performance but potential waning interest.
- 03J.P. Morgan forecasts gold prices to average $6,000/oz by Q4 2026, contrasting current diminished investor interest in gold.
- 04Overall investor focus may need to diversify as market conditions evolve, impacting momentum-driven strategies.
Full Analysis
What the desk is arguing
The current analysis suggests that the momentum trade may be reaching its limit as the market grapples with widening performance gaps among stocks. With momentum dispersion at the highest level since 1990, a rotation towards undervalued sectors is anticipated. Per the full note, the strong outperformance of the MSCI USA Momentum Index indicates that this trend is not as sustainable as it once appeared.
Furthermore, J.P. Morgan forecasts that investor interest might shift from high-flying momentum stocks into other areas of the market that have been lagging, creating opportunities in neglected sectors. This shift is evident as overall investor interest is declining even amidst significant gains.
Where it sits in our coverage
Our internal consensus for the EUR/USD is set at a target of 1.075 with a range spanning from 1.04 to 1.12, reflecting differing outlooks among banks on currency pair movements. Specifically:
This position is central within the current consensus, with jpmorgan slightly above the average target while bofa sits below it, indicating a divergence in sentiment regarding the most favorable directional trade in this environment.
How other firms see it
Most firms are cautious, echoing the desk's views on the diminishing strength of the momentum trade. Aligned firms, such as jpmorgan, support the idea that a significant market shift might be underway. Conversely, firms like bofa express skepticism, predicting more downside potential in equity markets.
In the current market climate, equity movements will likely impact currency pairs such as the USD/EUR connection, as shifts in risk sentiment might encourage volatility across major currencies like USD/JPY.
Market Implications
Traders should watch for signs of sector rotation, which could manifest through shifts in equity performance, particularly in lagging sectors. A reversal below the 200-day moving average in key indices could signal further downside for current momentum trades.
From the original
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Related speeches
4 itemsJPMorgan U.S. Momentum Factor (JMOM) Technical Analysis - Traders Union
Small-Cap Revival
The desk interprets the current investment trend toward small- and mid-cap (SMID) stocks as indicative of a shifting market dynamic, with traders increasingly favoring these assets over larger mega-cap stocks. Per the full note from J.P. Morgan, the rally has been supported by improving fundamentals and substantial valuation discounts. This shift is reflected in the Russell 2500 index's notable 16% increase, which notably outperforms the S&P 500. With emerging market equities reporting higher year-to-date returns compared to their U.S. and Eurozone counterparts, a persistent interest in SMID stocks could represent a broader risk-on sentiment among institutional investors.