As It Just So Happened: Momentum & the 1Q Equity Rally

If you felt like this year’s equity rally unfolded at high speed, that’s probably because it did. Now, with that same rally seemingly on pause we examine that conclusion and consider whether this event was unique as compared to the last two decades’ worth of big comebacks.

Framework for our analysis

Price momentum is not the same as return – it is the rate of price change observed over a given period, so it provides a useful frame of reference for comparing the intensity of the sell-off that precedes a rally versus the intensity of the rally itself. It also provides for apples-to-apples comparisons of historical events.  Momentum is also the focus of our quantitative platform (but note, in executing our strategies we use risk-adjusted momentum measured with proprietary techniques and inputs that were NOT deployed in this basic market analysis). We also note that the below is a simple, illustrative analysis using momentum – it is not robust technical analysis by any definition.

Observations

This year’s S&P 500 rally has been the sixth-most intense in the last twenty years on the basis of a simple calculation that considers the spread between momentum over the last 30 days versus momentum in the 60 days prior.* For purposes of this analysis, we ranked rallies only. As shown in the first chart below, just a handful of rallies have seen the momentum spread peak higher than it did on February 4 of this year – i.e., only a handful of times has the S&P 500 reversed to the upside more sharply than it did in the last couple of months.

The table provides important historical context to this analysis:

Finally, the spread breakdown for these market events also illustrates why this rally may be as unique as it felt:

Key differences? In the majority of cases, the severity of negative momentum in the prior period accounts for most of the spread – that is, the negative momentum in the prior period exceeds the strength of positive momentum during the observation period. In December 2008/ January 2009, for example, the spread was more a function of losses tapering off than of major upward price moves.

We note that the peak notched in April 2009 capped the only other period where positive momentum contributed more to the spread than prior-period negative momentum did. That particular rebound began after March 9, 2009, when markets found the bottom of the worst crash since the Great Depression. As we all know, that same equity bull market turns 10 years old later this week.

Armed with an understanding of how the most recent rally stacks up relative to history, we return to a more nebulous comparison – that is, how the rally played out versus how it “felt.” For that examination, we look towards the prologue to the rally – the sell-off. Interestingly, as dramatic as the Christmas Eve sell-off felt in comparison to any single day in 1Q (the first correction that occurred in 2018) or in the first 4Q sell-off (October), December did not deliver the worst (i.e., most negative) 30-day price momentum trend. The momentum spread for 2018 actually bottomed out in late October, reflecting the abruptness of that initial sell-off after markets had gradually clawed back from the February 2018 correction. February 2018 also had the second-lowest spread, reflecting the severity of that reversal as compared to the December sell-off.

All said, despite the day-to-day drama the meltdown in the S&P during December was actually more gradual than both the 1Q reversal and the October sell-off, but the rally was significantly more abrupt. Further, the speed of this year’s rally put it in the league of some of the biggest comebacks observed over the last 20 years.

*For purposes of analyzing the thus-far 1Q 2019 rally, we used the S&P 500 and measured the daily spread between the 30-day price momentum and the price momentum that occurred in the 60 days prior to that observation period. For example, the February rally peaked at a spread of 24.3% – the price change between January 4, 2019-February 4, 2019 (+16.4%) minus the price change between November 4, 2018 – January 4, 2019 (-8.0%). We looked only at positive momentum and ranked the peak values on an event level – that is, we chose the highest value among spreads grouped around a single rally. Each period “re-set” when the momentum spread dropped below zero.