Factor analysis is worth your time!
A brief note on my thoughts on factor analysis.
Hi Friends, why do I use factor analysis? Well, I use factor analysis to make better-informed decisions during the investment selection process. I can target stocks that show a lower level of volatility than their peers or I can seek to provide myself with diversified exposure to a variety of factors or even focus exposure to a factor that has been a long-term driver of returns. Overall, investing in factors helps me meet my investment objectives, such as reducing risk, increasing profits, and increasing diversification. Now let us summarise six of the most widely observed factors:
Value is looking to capture excess returns on stocks that have low prices relative to their fundamental value.
Small-Cap is looking to capture excess returns on smaller firms relative to their larger counterparts.
Momentum is looking to capture excess returns on stocks with stronger past performance.
Low volatility is looking to capture excess returns on stocks with lower than average volatility & beta.
Dividend yield is looking to capture excess returns on stocks that have higher-than-average dividend yields.
Quality is looking to capture excess returns on stocks that show low debt, stable earnings growth, and other quality metrics.
Factors during the COVID market.
Now in focusing our attention to 2020 performance, there are three key themes evident by the chart below:
Momentum has been resilient.
Value and Small-Cap have underperformed.
Growth has outperformed the broader market.
The resilience of momentum
$MTUM selects its exposure to large- and mid-cap US stocks that are showing relatively higher price momentum
$MTUM is currently trading near its 52-week high, and both the short term and long term trends are positive.
Key support is in the region of 113.50 & the 50% Fib level.
Near term resistance is at the all-time high from last week.
Price smoothing: Continues to slope upwards.
Momentum: RSI in a bullish range with room for more upside movement
Relative Strength: Has been in a flat performance relative to the S&P 500 for the past three years; however, recently it has had a strong move upwards past my key level, which has been highlighted. In my custom relative strength ranking system, it shows a 9 out of 10
Bullish evidence: $MTUM crossed above its 200-day moving average 43 days ago and has moved upwards by 13.12% and continues its upward trend. Year to date it has returned 10.51%
Overall, this chart has a bullish appearance with a confluence of technical evidence pointing to further upside.
Top 10 Holdings:
The continued underperformance of value and small-cap
$IWD draws its holdings from the Russell 1000, and it seeks to track the investment results composed of large- and mid-capitalisation US equities that are thought to be undervalued by the market relative to comparable companies.
In the last month, $IWD has a been trading in the range since fading from its 200-day moving average test. Its long-term trend is still sideways.
Near term support is in the region of 105 & the 38.2% Fib level.
Near term resistance is in the region of 117 & the 61.8% Fib level.
Price smoothing: Has been a sideways market for the past three years.
Momentum: RSI in a neutral ranges
Relative Strength: Clearly underperforming relative to the S&P 500. In my custom relative strength ranking system, it shows a 4 out of 10
$IWD has been fading since testing 200-day moving average one month ago; however, it is finding some support at the 50% Fib level
Overall, this chart has a continuing sideways appearance with a confluence of technical evidence pointing to further sideways price action. The key level is the 38.2% Fib level if this doesn’t hold going forward and we will see a retest of 2020 lows.
Top 10 Holdings:
Moving onto $SLY, it invests in stocks of companies operating across diversified sectors. $SLY invests in growth and value stocks of small-cap companies. $SLY seeks to track the performance of the S&P SmallCap 600 Index.
Longer-term $SLY has been an average performer as it continues its sideways movement. On the shorter term, $SLY has a been trading in a range and around a key level of support.
Near term support is in the region of 56.50 (2018 low) & the 50% Fib level.
Near term resistance is in the region of 61.50 & 61.8% Fib level.
Price smoothing: Ranging market that has recently turned into a downwards sloping line
Momentum: RSI in a neutral ranges
Relative Strength: Clearly underperforming relative to the S&P 500 but recent movement looks to be forming a base. In my custom relative strength ranking system, it shows a 5 out of 10
Bearish evidence: recently $SLY has been fading since testing 200-day moving average and is still 22.53% below its ATH which was set back in August 2018
Overall, this chart has a bearish to sideways appearance with a confluence of technical evidence pointing to further sideways or downwards price action. If the 50% Fib level doesn’t hold going forward, we should see a retest of 2020 lows.
Top 10 Holdings:
Growth has outperformed
$IWF invests in stocks of companies operating across diversified sectors. $IWF invests in growth stocks of companies across diversified market capitalisation. $IWF seeks exposure to US companies whose earnings are expected to grow at an above-average rate relative to the market.
When comparing the yearly performance of all factor styles, I have noticed that $IWF is the best performing style. Both the short term and long-term trends are positive and is currently trading near its 52 week high.
Key support is in the region of 193, which is the peak before the COVID crash.
Near term resistance is at the all-time high from last week.
Price smoothing: Continues to slope upwards.
Momentum: RSI in a bullish range with room for more upside movement
Relative Strength continues to outperform relative to the S&P 500. In my custom relative strength ranking system, it shows a 9 out of 10
Bullish evidence: $IWF crossed above its 200-day moving average 57 days ago and has moved upwards by 16.40% and continues its upward trend. Year to date it has returned 14.51%
Overall, this chart has a bullish appearance with a confluence of technical evidence pointing to further upside.
Top 10 Holdings:
That’s it from me today!
Stay safe and good luck out there…
GH
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