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Bank of America (BofA) highlighted a shift in stock market trends, noting that liquidity was the most successful factor among small-cap stocks in the Russell 2000 index last month.
Larger small-cap stocks, which align with broader market performance, saw leadership roles as the Russell MidCap index outperformed the Russell 2000. For long-short investors, Market Capitalization and 3-month Average Daily Dollar Volume were among the top alpha-generating factors, along with several sales-based valuation factors.
However, value factors did not perform as well, consistent with the underperformance of the Value index compared to the Growth index. Risk factors also fared poorly, and Short Interest was identified as the least effective long factor.
In contrast, within the Russell MidCap index, Momentum factors dominated, with nine out of the top ten long factors and six out of the top ten long-short factors being Momentum/Technical factors, led by 5-week/30-week moving averages.
BofA also reported a change in the market regime from ’muddled’ to ’Recovery’. The bank’s US Regime Indicator, which had been fluctuating between "Downturn" and "Recovery" for the past two years, saw its most significant month-over-month increase since bottoming out three months ago, with six of its eight inputs showing improvement.
If this shift to recovery is sustained, Value stocks are expected to benefit the most, having historically shown the greatest alpha and most consistent outperformance during such phases.
The bank’s analysis suggests a preference for Value over Growth across large and small to mid-sized (SMID) caps. Value stocks are also historically cheaper and could benefit from a broadening of the profit recovery. In the small-cap space, Value stocks are considered higher quality.
BofA also provided a screen for Buy-rated small and mid-cap Value stocks that perform well in terms of earnings per share revisions and earnings surprises.
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