Factor Lab Daily Brief 2026-07-20
Momentum factor dominates with IC +0.224 and ICIR +2.70. IT sector momentum spread hits -28.5%. Value factors are systematically failing — classic growth/momentum regime. Health Care is the sole momentum reversal sector (IC -0.128), signaling style rotation.
I. Full Factor IC Test
Based on S&P 500 constituents, 21-day holding period, 39-week IC series.
| Factor | IC Mean | ICIR | IC>0 % | p-value | L/S Spread (Q1-Q5) | Signal |
|---|---|---|---|---|---|---|
| ep (Earnings Yield) | -0.062 | -0.74 | 17.9% | 0.000 | +3.87% | ⚠️ Significant Reversal |
| bp (Book-to-Price) | +0.006 | +0.08 | 46.2% | 0.635 | +0.82% | ❌ Ineffective |
| fcf_yield (FCF Yield) | -0.059 | -1.43 | 7.7% | 0.000 | +3.04% | ⚠️ Significant Reversal |
| roe (Return on Equity) | -0.041 | -1.23 | 12.8% | 0.000 | +1.11% | ⚠️ Significant Reversal |
| mom (Momentum) | +0.224 | +2.70 | 100.0% | 0.000 | -8.07% | ✅ Monotonic |
| vol (Volatility) | +0.132 | +1.05 | 79.5% | 0.000 | -7.61% | ✅ Effective |
| size (Market Cap) | +0.048 | +1.25 | 87.2% | 0.000 | -2.06% | ✅ Effective |
II. Key Findings
Momentum Dominates
Momentum factor recorded an IC mean of +0.224 with ICIR +2.70 and a perfect 100% positive IC hit rate. Over the past 39 weeks, momentum has never posted a negative IC observation. The long-short spread of -8.07% is monotonic — Q1 weakest (-0.12%), Q5 strongest (+7.95%) — textbook factor performance.
Value Factors Collapse
All three value factors (EP, FCF_Yield, ROE) show significantly negative ICs. FCF_Yield positive IC rate is just 7.7%, ROE at 12.8%, EP at 17.9% — this is not occasional underperformance but systematic failure. The market is in a classic growth/momentum-led regime: cheap gets cheaper, expensive gets more expensive.
Volatility and Size Factors Stable
Low-vol strategies are failing (high-vol stocks outperform), with a -7.61% L/S spread. Large caps continue to outperform small caps (size IC +0.048), consistent with the classic large-cap growth leadership pattern in momentum bull markets.
III. Momentum by Sector
| Sector | IC Mean | ICIR | IC>0 % | L/S Spread | Signal |
|---|---|---|---|---|---|
| Consumer Discretionary | +0.252 | +2.11 | 100.0% | -6.21% | ✅ Monotonic |
| Consumer Staples | +0.209 | +1.34 | 87.2% | -4.67% | ✅ |
| Financials | +0.309 | +2.63 | 100.0% | -7.19% | ✅ |
| ⚠️ Health Care | -0.128 | -1.21 | 15.4% | +7.51% | 🔄 Reversal |
| Industrials | +0.266 | +2.88 | 100.0% | -7.14% | ✅ Monotonic |
| 🔥 Information Technology | +0.524 | +2.58 | 100.0% | -28.54% | ✅ Monotonic |
| Real Estate | +0.124 | +0.84 | 74.4% | -3.83% | ✅ |
| Utilities | +0.199 | +1.01 | 76.9% | -0.63% | ✅ |
IT Sector: Extreme Momentum
IT sector momentum IC reaches +0.524 with a staggering -28.54% long-short spread. Q5 (strongest momentum) averaged +27.2% over 21 days, Q4 +15.9%, Q3 +13.6% — winner-takes-all. IT momentum is experiencing extreme positive clustering, making long IT winners the clearest alpha source available.
Health Care: The Sole Reversal Signal
Health Care is the only sector where momentum fails, with IC -0.128 and only 15.4% positive IC rate. Q1 (weakest momentum) averaged +4.84% while Q5 returned -2.66%, producing a +7.51% reversal spread. This suggests significant style rotation underway — previously beaten-down names are bouncing hard while former leaders are under pressure.
Financials and Industrials: Steady Contributors
Financials (IC +0.309) and Industrials (IC +0.266) show stable, well-behaved momentum effects with good monotonicity — the most attractive momentum exposures after IT.
IV. Anomaly Detection
✅ All factors within normal fluctuation range. No anomalies detected.
V. Strategy Implications
- Overweight momentum in IT and Financials: Both show 100% positive IC hit rates with large, monotonic spreads.
- Avoid value factors for now: EP, FCF_Yield, and ROE are all systematically negative — value strategies are bleeding.
- Consider contrarian plays in Health Care: Clear momentum reversal signal; beaten-down names offer bounce potential.
- Large-cap growth regime persists: Size and vol factors both point to large-cap, high-vol growth dominance.
- Watch IT momentum crowding: Q5 return of +27% is extreme — monitor for momentum crash risk.