Here’s one more piece of evidence that something’s amiss in the U.S. stock market: A usually reliable strategy used by quants is suddenly on the fritz.
Quantitative investors have long used liquidity signals to strengthen their automated models. Simply put, bets on the least traded stocks should, in theory, outperform the market because there’s a reward for taking on the extra liquidity risk.
But since December the opposite has been occurring, with the most liquid stocks rewarding investors to the greatest degree in nine years.
In normal times, heavily traded shares don’t overlap much with momentum stocks. Reliable companies carry the market higher without any frenzied buying or selling. Amazon.com Inc., for example, has one of the lowest turnover ratios in the S&P 500 Index, according to data compiled by Bloomberg.
Yet in a long-short Bloomberg index that bets on the most actively traded stocks, a hefty chipmaker presence has the gauge headed toward its best month since 2009. That semiconductor shares are rising so quickly despite a high turnover is an ominous signal, indicating that trigger-happy, short-term investors are wading into momentum, according to Vitali Kalesnik, head of equity research at Research Affiliates LLC.