Factor Lab Daily 2026-07-22
Momentum continues to dominate with IC +0.224, ICIR +2.70, and 100% positive hit rate. Value factors (EP, FCF Yield, ROE) all show significantly negative ICs. Information Technology leads sector momentum while Health Care shows a notable reversal signal. High volatility factor remains strongly positive as low-vol strategies continue to underperform.
Factor IC Analysis
| Factor | IC Mean | IC Std | ICIR | t-stat | Positive Rate | Q1-Q5 L/S Return |
|---|---|---|---|---|---|---|
| Momentum | +0.224 | 0.083 | +2.70 | +16.62 | 100.0% | -8.07% |
| Volatility | +0.132 | 0.126 | +1.05 | +6.48 | 79.5% | -7.61% |
| Size | +0.048 | 0.038 | +1.25 | +7.70 | 87.2% | -2.06% |
| Book-to-Price | +0.006 | 0.072 | +0.08 | +0.48 | 46.2% | +0.82% |
| Earnings Yield | -0.062 | 0.084 | -0.74 | -4.57 | 17.9% | +3.87% |
| FCF Yield | -0.059 | 0.041 | -1.43 | -8.79 | 7.7% | +3.04% |
| ROE | -0.041 | 0.034 | -1.23 | -7.58 | 12.8% | +1.11% |
Key Signals:
- Momentum is in a league of its own. IC +0.224, ICIR +2.70, and a perfect 100% positive hit rate over the past 39 periods — not a single negative IC observation. Q5 winners averaged +7.95% while Q1 losers were essentially flat (-0.12%). A long-winners/short-losers strategy yields an 8.07% annualized spread. This is the most reliable factor in the current market.
- High volatility significantly outperforms. High-vol stocks (Q5) returned +8.15% on average versus only +0.54% for low-vol (Q1). Low-volatility strategies continue to fail in the current environment.
- Value factors in full retreat. All three value-oriented factors — EP, FCF Yield, and ROE — show significantly negative ICs. The market is completely ignoring fundamental valuation: cheap stocks are getting cheaper while high-multiple growth names keep running. This is a classic risk-on expansion regime.
- Book-to-Price provides no signal. IC near zero with insignificant t-statistic. Price-to-book offers no differentiation in the current period.
- Size tilts large-cap. Q5 large-caps +4.51% vs Q1 small-caps +2.45%, a roughly 2% edge for larger names, though the magnitude is modest.
Sector Momentum Decomposition
| Sector | IC Mean | ICIR | t-stat | Q5 Return | Q1 Return | L/S Return |
|---|---|---|---|---|---|---|
| Info Tech | +0.524 | +2.58 | +15.93 | +27.19% | -1.35% | -28.54% |
| Financials | +0.309 | +2.63 | +16.19 | +7.80% | +0.61% | -7.19% |
| Industrials | +0.266 | +2.88 | +17.74 | +5.51% | -1.63% | -7.14% |
| Consumer Discretionary | +0.252 | +2.11 | +13.01 | +2.15% | -4.05% | -6.21% |
| Consumer Staples | +0.209 | +1.34 | +8.27 | +0.02% | -4.65% | -4.67% |
| Utilities | +0.199 | +1.01 | +6.20 | -1.66% | -2.29% | -0.63% |
| Real Estate | +0.124 | +0.84 | +5.18 | +4.95% | +1.12% | -3.83% |
| Health Care | -0.128 | -1.21 | -7.43 | -2.66% | +4.84% | +7.51% |
Sector Signal Interpretation:
- Information Technology is the momentum king. IC +0.524, the strongest across all sectors. Q5 winners delivered +27.19% annualized — a 28x gap over Q1. The AI/semiconductor theme continues to drive the market with extreme winner-takes-all dynamics within the sector.
- Financials and Industrials close behind. Both cyclical sectors show ICIR above 2.6 with 100% positive hit rates. Financials Q5 +7.80%, Industrials Q5 +5.51%. The rate environment and infrastructure spending remain tailwinds.
- Health Care shows a notable reversal. IC -0.128 — the only sector with negative momentum. Past losers (Q1) rebounded +4.84% while past winners (Q5) fell -2.66%. Momentum strategies are actively losing money in healthcare. This could be an early signal of sector rotation.
- Utilities momentum is weak. Q5 returns are actually negative (-1.66%) with a meager -0.63% long-short spread. This is not a sector for trend-following.
- Consumer Staples shows severe dispersion. Q1 losers dropped -4.65% while Q5 winners barely moved (+0.02%), suggesting losers keep losing but winners lack follow-through momentum.
Summary
Market Regime: Growth/Momentum dominance, value factors completely ineffective.
Momentum and volatility are the only two factors delivering statistically significant and economically meaningful alpha. All value factors (EP, FCF Yield, ROE) recorded negative ICs — cheap stocks are getting cheaper. This is not a value investor’s market.
At the sector level, Information Technology, Financials, and Industrials show the strongest momentum effects, while Health Care exhibits a rare reversal signal — potentially an early indicator of sector rotation. If you’re chasing momentum in healthcare, the last 39 periods say you’re losing money.
Strategic Implications: Ride the trend, don’t fight it. In the current environment, long-winner/short-loser strategies outperform pure long-value approaches. However, the stronger the momentum consistency, the more violent the eventual reversal — maintain disciplined position sizing.