What does "Factors of Flow" mean?
Title.
From a newsletter I like:
"Contrary to what was thought to be a chill week before the labor day weekend, the market was under a lot of pressure from the hawkish Fed, OPEC oil production cut/oil price surges, European recession fear and disappointing earnings results from MongoDB, CRWD, Okta etc. IGV was down -3% in a week as more funds were pivoted towards short positions or risk management. Over the past few days, we received many questions on whether the market will revert to the June level; currently, we don’t see that happening. We think what is more likely to happen is the market trade sideways as there is not enough upward momentum when liquidity starts to drain. At the same time, the US financial condition has not deteriorated enough to put us into a severe recession. Short-term market pricing will be driven by factors and flow instead of a strong conviction on either long or short. Given an eventful summer (a bear market rally starting in July followed by a heavy sell-off in August), we will comb through the data and do a sanity check on earnings, valuation and rates."
Thank you!
Factors and flows, not factors of flows
Factors = mechanically constructed baskets of stocks fitting some numerically defined criteria (e.g. momentum, value, profitability, growth)
Flows = technical buying and selling pressure caused by investors rotating capital into / out of an asset class, sector, security, etc.
This industry feels the need to "explain" every single price movement, even over short horizons. When someone chalks up price action to "factors" or "flows" what they mean is: "these price movements are not driven by changes in the meaningful fundamental business metrics, at least not that I can tell". It's a cop out / catch all tautology used to "explain" market moves that can't be explained by fundamentals / don't really need explaining (unless you're in a short term trade-y environment). Also used as an excuse for why it's tough to pick stocks (e.g. "the current environment is being driven by these macro overarching rotations that chop around all the stocks together").
Thanks.
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