Factor Lab Daily Brief 2026-07-26
Momentum continues to dominate with ICIR 2.70 — the strongest factor across the board. Value factors (EP, FCF Yield, ROE) all show significant negative IC, signaling a market that punishes cheap and rewards growth. Information Technology leads sector momentum with IC 0.524 and Q5 21-day return of 27.2%. Health Care is the only sector showing momentum reversal.
All-Factor IC Analysis
Data as of 2026-07-26, covering S&P 500 constituents with a 39-period lookback (~8 months), 21-day holding period.
| Factor | IC Mean | ICIR | t-stat | p-value | IC Win% | Q1 Ret | Q5 Ret | L/S Spread |
|---|---|---|---|---|---|---|---|---|
| Momentum | 0.224 | 2.70 | 16.62 | 0.000 | 100.0% | -0.12% | 7.95% | -8.07% |
| Volatility | 0.132 | 1.05 | 6.48 | 0.000 | 79.5% | 0.54% | 8.15% | -7.61% |
| Size | 0.048 | 1.25 | 7.70 | 0.000 | 87.2% | 2.45% | 4.51% | -2.06% |
| BP | 0.006 | 0.08 | 0.48 | 0.635 | 46.2% | 3.88% | 3.06% | 0.82% |
| ROE | -0.041 | -1.23 | -7.58 | 0.000 | 12.8% | 4.82% | 3.71% | 1.11% |
| FCF Yield | -0.059 | -1.43 | -8.79 | 0.000 | 7.7% | 5.64% | 2.60% | 3.04% |
| EP | -0.062 | -0.74 | -4.57 | 0.000 | 17.9% | 6.41% | 2.54% | 3.87% |
Key Findings
Momentum reigns supreme. IC mean of 0.224, ICIR of 2.70, and a 100% positive IC rate — statistically extraordinary. The Q5 (high momentum) portfolio averaged 7.95% over 21 days, versus -0.12% for Q1 (low momentum), producing an 8.07pp long-short spread.
Value factors are broken. EP, FCF Yield, and ROE all show statistically significant negative IC. High earnings-yield stocks returned just 2.54%, while low EP stocks delivered 6.41%. This is not “value mean-reverting” — it’s value consistently underperforming. The market is rewarding high valuations and growth expectations, punishing anything that looks cheap.
BP is the only neutral value factor. IC near zero, ICIR 0.08, p-value 0.635 — book-to-price has zero differentiating power in the current market.
High volatility = high returns. The Volatility factor shows positive IC (0.132) with a -7.61% long-short spread — high-vol stocks are dramatically outperforming low-vol. This is classic risk-on behavior: capital is chasing beta.
Large-cap preference. Size factor IC of 0.048, with Q5 beating Q1 by ~2pp. The market is concentrating into mega-caps; small and mid-caps are lagging.
Sector Momentum Decomposition
| Sector | IC Mean | ICIR | IC Win% | Q1 Ret | Q5 Ret | L/S |
|---|---|---|---|---|---|---|
| Info Tech | 0.524 | 2.58 | 100.0% | -1.35% | 27.19% | -28.54% |
| Financials | 0.309 | 2.63 | 100.0% | 0.61% | 7.80% | -7.19% |
| Industrials | 0.266 | 2.88 | 100.0% | -1.63% | 5.51% | -7.14% |
| Cons. Disc. | 0.252 | 2.11 | 100.0% | -4.05% | 2.15% | -6.21% |
| Cons. Staples | 0.209 | 1.34 | 87.2% | -4.65% | 0.02% | -4.67% |
| Utilities | 0.199 | 1.01 | 76.9% | -2.29% | -1.66% | -0.63% |
| Real Estate | 0.124 | 0.84 | 74.4% | 1.12% | 4.95% | -3.83% |
| Health Care | -0.128 | -1.21 | 15.4% | 4.84% | -2.66% | 7.51% |
Info Tech is the momentum king. IC of 0.524, Q5 21-day return of 27.19%, versus -1.35% for Q1 — a spread of nearly 29pp. Within Tech, momentum stratification is extreme: winners take all, losers get crushed.
Financials and Industrials follow. Both sectors show IC of 0.26-0.31 with ICIR above 2.6 — robust and persistent momentum. In Financials, even Q1 is positive (0.61%), suggesting the entire sector is in an uptrend with momentum amplifying returns.
Health Care is reversing. IC of -0.128, ICIR of -1.21 — the only sector with significantly negative momentum. Q1 (prior losers) returned 4.84%, while Q5 (prior winners) returned -2.66%. Health Care is undergoing aggressive mean reversion: what went up is coming down, and vice versa.
Strategy Implications
We are in a classic trend-following regime. Momentum’s dominance (ICIR 2.70, 100% win rate) signals strong market directionality. Reversal strategies would have bled consistently during this period.
Don’t buy the value dip. Three value factors — EP, FCF Yield, ROE — are all significantly negative in unison. This is not noise. The market is systematically rewarding growth and momentum while punishing static cheapness. BP’s neutrality confirms that even the last pillar of deep value has crumbled.
Sector rotation signal is clear: overweight Tech + Financials, underweight Health Care. Tech and Financials show the strongest momentum with consistent direction (negative L/S spreads = profitable long-winner/short-loser). Health Care is in mean-reversion mode — if holding healthcare names, consider taking profits on recent outperformers.
Risk note: A 100% momentum win rate is unsustainable. When every factor points in the same direction, crowding risk accumulates. Maintain position-sizing discipline.