Could quants chase energy stocks higher? BlackRock's $10b quant rebalance might
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BlackRock's (BLK) iShares MSCI USA Momentum Factor ETF (MTUM) is preparing for its semi-annual rebalance next week. This ETF, representative of several active and quantitative strategies across Wall Street, claims to provide "exposure to large-and mid-cap US stocks exhibiting relatively higher price momentum." Said another way, the ETF buys stocks that have recently rallied, and sells stocks that have recently underperformed.
As counter-intuitive as the practice may sound, Fidelity summed up Wall Street's view in 2016 writing, "due to common investor behaviors, momentum investing has led to outperformance over time." Perhaps Fidelity and BlackRock are right in their assessments, and chasing winners while selling losers is a profitable strategy. Or perhaps a select few very large tech stocks outperformed for unrelated reasons over the past decade, driving strong returns for "momentum" investors. Regardless of the long-term effectiveness of the strategy, a rebalancing could have very real short-term effects. 
Energy stocks (XLE) have underperformed technology stocks (QQQ) for nearly a decade. While the economic fundamentals warranted underperformance, Wall Street's pattern of "buying winners" and "selling losers" exacerbated the economic fundamentals. Companies growing earnings were rewarded with higher valuation multiples, while companies with cyclical returns saw valuation multiples compress. Ten years ago, Apple (AAPL) traded at 12x earnings, today and with much higher earnings, Apple (AAPL) trades at 25x. With companies like Exxon (XOM) trading at 9-10x earnings, the result is that Apple (AAPL) holds a higher weighting in the S&P 500 than all energy companies combined. 
In recent quarters, economic fundamentals have shifted. A variety of factors have lifted oil (USO), gas (UNG) and refining profits, resulting in energy equities (XLE) rising 47% year-to-date, while technology companies (QQQ) have fallen 27%. But for BlackRock's momentum ETF (MTUM), now is the time to buy energy and sell tech. The fund rebalances twice a year, and according to Bloomberg, the rebalance will begin next week. BlackRock's Momentum ETF (MTUM) alone manages $10b. Multiply that AUM across numerous similar funds, and investors can begin to see how "forced buying" and selling could impact prices. 
The "forced selling" of technology companies may be of little impact. At 28% of the S&P 500, only a small portion of tech's holder base could be attributed to quantitative or momentum strategies. However, energy is a tiny sector, still less than 4% of the S&P 500. When quantitative funds like BlackRock's (BLK) begin to re-weight assets from what is an ocean of tech market cap, into what is a tiny sliver of energy market cap, the impacts are likely to be noticeable.