I was playing around with an idea about why and when the factors that used to work seemed to have stopped and of course I wanted to test just how true that was. There has been a fair bit of talk about this over the last few months. Mostly with respect to regime change and value is lost. There is some truth to this from what I see.
So here’s what this crude graph shows:
The data points (not sp500) are the SLOPE of the ranking for a single factor with default direction (lower is better in this case). The test used the SP500 universe with a 1yr period. A positive slope (above 0) means the histogram has a positive relationship to the factor over the past 12mths. In that case it also tells me that investors are VALUE seeking.
Therefore a negative slope (below 0) means that the histogram has a negative relationship with the factor over the past 12mths. In that case it tells me that investors are GROWTH seeking. As I’m typing this out it makes me think I should try this with P/E.
- SP500 of course
- 1yr period, 6mth rolling pr2SalesTTM
- 1yr period, 6mth rolling pr2CashFlowTTM
There are a few things that I get out of this graph and maybe some of you can see more or possibly this is meaningless.
- The obvious one is that the linear regression line is a negative slope with an X intercept at the beginning of 2014. The date of the X intercept is somewhat arbitrary due to being start date dependent but approximate year is good enough for me. So these factors are currently on a path that puts growth over value and maybe we should think about flipping the direction to higher is better in the future??
- There seems to be some mild correlation between the run up before a correction. When growth is heavily favored over value, let’s call that a negative data point <-1. It seems to indicate a previous year of exuberance only to follow with some kind of correction. The exception to this rule is RIGHT NOW. So I’m not sure how to interpret that at the moment. Correction coming soon perhaps?
- During a correction investors seem to seek VALUE again. A positive data point doesn’t necessarily mean that the factor is profitable however it does show that value is a safer place to bet than growth in down markets.