Momentum trade gaining ground

Helped by lower real rates

Chart of the Day

The ratio of the iShares Momentum ETF to the ProShares S&P 500 Dividend Arostpcrats, a proxy for the growth vs value trade, has been on the rise again and has reached its highest level since the start of the year. That’s not a good sign for those that have been touting value stocks as most likely to outperform since the Fed signaled that it will soon taper QE and since it raised its expectations for interest rates. The theory appeared to be sound, with bond yields rising sharply since the Fed’s meeting. But that has been due to higher inflation breakevens, whereas real interest rates have dropped back sharply, and that fall in real rates has been most positive for the momentum stocks.

Macro

Some weaker signs for the US housing market - housing starts fell to 1,555,000 annualized in September, while building permits decreased to 1,589,000.

Markets

A selection of assets that typify risk-on trades has risen by 3.2% in the past week while a selection that typify risk-off trades has been little changed.

That is mainly due to the strong rise in copper prices though - and that appears to be more supply-related than anything, so not as positive as it might seem.

Non-commercial traders are still not especially bullish on copper, with long positions relatively low.

Despite a weak day for wholesale gasoline prices yesterday, they are still up by 17.4% in the past month.

Lumber has also been doing well again, until yesterday at least.

In general, traders are still not piling into commodity positions, with the net position long but not especially so.

The strength of some commodities prices like oil and copper have helped Canada’s TSX be among the top performers in the past month. The UK FTSE also has several large mining-related companies among its constituents.

Although momentum stocks are rising again verus dividend payers, the ratio of the S&P 500 to the Russell 200 has not picked up by that much.

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