Happy Friday. This week we're going to discuss how Profitability (a component of Quality) is Oversold in both our US and Global models, and provide an update on Medium-Term Momentum (which we had flagged as Overbought last week).
Profitability
If you recall our Factor Spotlight note on 4/26/18, we introduced Profitability as a key proxy for Quality. Profitability is a combination of return-on-equity, return-on-assets, cash flow to assets, cash flow to income, gross margin, and sales-to-assets. Overall, the long-term risk premia for Profitability has been strongly positive.
Recently, however, we're observing a decoupling from the long-term trend.
US Model
In the US, normalized return for Profitability has fallen to Sep 13th's -1.63 SD below the historical mean. There currently appears to be a flattening of the curve, as we see the factor has rallied in the past week on a cumulative basis.
Global Model
Profitability has sold off even more on a worldwide basis, currently sitting at -1.74 SD below the mean, very gradually rising from a Sep 4th trough of -1.83 SD below the mean.
Usually, when we see this type of movement in both models, it makes for a much stronger signal.
Regards,
Omer
PS - Click here if you'd like to learn more about factor trends