πŸ“Š Cross-Market Factor IC Test

Backtest Period: 39 weeks | Universe: S&P 500 constituents | Data: Daily TTM financial panels

FactorIC MeanICIRIC>0 %t-statp-valueQ1 Mean RetQ5 Mean RetLong-Short
Momentum (mom)+0.2242.70100%16.620.000-0.12%+7.95%-8.07%
Volatility (vol)+0.1321.0579.5%6.480.000+0.54%+8.15%-7.61%
Market Cap (size)+0.0481.2587.2%7.700.000+2.45%+4.51%-2.06%
Earnings Yield (ep)-0.062-0.7417.9%-4.570.000+6.41%+2.54%+3.87%
FCF Yield (fcf)-0.059-1.437.7%-8.790.000+5.64%+2.60%+3.04%
ROE-0.041-1.2312.8%-7.580.000+4.82%+3.71%+1.11%
Book/Price (bp)+0.0060.0846.2%0.480.635+3.88%+3.06%+0.82%

Note: Q1 = lowest factor quintile, Q5 = highest. Long-short = Q1 - Q5

Key Findings

1. Momentum Factor: Absolute Dominance

  • ICIR 2.70 with 100% positive IC over 39 weeks β€” every rebalance in the past year
  • Q5 (strongest momentum) averages +7.95%/week vs Q1 (weakest) at -0.12%
  • Long-short spread of -8.07% β€” shorting losers has been extraordinarily profitable

2. High Volatility = High Returns (Extreme Risk-On)

  • Volatility factor ICIR 1.05 β€” high-vol stocks systematically outperform low-vol
  • Q5 (highest vol) +8.15% vs Q1 (lowest vol) +0.54%
  • Classic risk-on signal: market is rewarding speculative behavior

3. Value Factors: Completely Dead

  • FCF Yield: ICIR -1.43 β€” high-FCF stocks systematically underperform (growth > value)
  • EP: ICIR -0.74 β€” high earnings yield stocks actually perform worse
  • BP: Near zero (ICIR 0.08, p=0.64) β€” book value is irrelevant for stock selection
  • Market is ignoring valuation entirely, driven purely by momentum and narrative

4. Size Factor: Large-Cap Preference

  • ICIR 1.25 β€” large-cap stocks systematically outperform small-cap
  • Q5 (largest market cap) +4.51% vs Q1 (smallest) +2.45%
  • Capital concentration toward倴部, possibly driven by AI megacap gravity

Factor IC

🏭 Sector Momentum Decomposition

Momentum IC by sector β€” same factor tested within each GICS sector

SectorIC MeanICIRIC>0 %Q1 RetQ5 RetLong-ShortVerdict
Info Tech+0.5242.58100%-1.35%+27.19%-28.54%πŸ”₯ Extreme
Industrials+0.2662.88100%-1.63%+5.51%-7.14%πŸ”₯ Extreme
Financials+0.3092.63100%+0.61%+7.80%-7.19%πŸ”₯ Extreme
Consumer Disc.+0.2522.11100%-4.05%+2.15%-6.21%🟒 Strong
Consumer Staples+0.2091.3487.2%-4.65%+0.02%-4.67%🟑 Moderate
Utilities+0.1991.0176.9%-2.29%-1.66%-0.63%🟑 Moderate
Real Estate+0.1240.8474.4%+1.12%+4.95%-3.83%🟑 Moderate
Health Care-0.128-1.2115.4%+4.84%-2.66%+7.51%⚠️ Reversal

Sector Insights

1. IT: Momentum Returns are Extreme

  • Q5 group averages +27.19% per period, long-short spread -28.54%
  • Momentum strategy never failed in IT sector over 39 weeks (100% positive IC)
  • AI/semiconductor leaders continue to vacuum capital β€” winner-take-all at its peak

2. Healthcare: The Only Reversal Signal ⚠️

  • ICIR -1.21 β€” the only sector where momentum runs in reverse
  • Cold healthcare stocks (Q1) actually surged +4.84%
  • Possible explanation: value rotation after oversold + defensive appeal attracting flows

3. Industrials/Financials: Robust Momentum

  • Both sectors with ICIR >2.5 and 100% positive IC
  • Benefiting from infrastructure investment expectations and rate environment

Sector Momentum

πŸ“‹ Summary

Current Market Regime:

  1. Pure Momentum Drive β€” Fundamental factors (EP, BP, FCF, ROE) collectively failing; market ignores valuation, follows trend only
  2. Extreme Risk-On β€” High-vol stocks outperform low-vol; speculation is being rewarded
  3. Top-Heavy β€” Large-cap preference; capital concentrating in IT/Financials/Industrials leaders
  4. Healthcare Reversal β€” Only contrarian sector showing mean-reversion; potential rotation signal

Strategy Implications:

  • Trend-following remains effective, but watch for momentum crash risk (FNG now in Extreme Fear)
  • Healthcare reversal signal worth monitoring β€” may be early indicator of defensive rotation
  • When value factors collectively fail, it often signals a structural market shift is underway