Equities Rise But High Beta Stocks Struggle To Outperform
Andrew Thrasher | Feb 16, 2020 01:57AM ET
One of the topics I spend a lot of time on each week in my Thrasher Analytics letter is risk appetite. I try to look at the market from multiple angles and evaluate how risk-averse or risk-hungry the data is suggesting investors are for the U.S. equity market.
One of the topics I spend a lot of time on each week in my Thrasher Analytics letter is risk appetite. I try to look at the market from multiple angles and evaluate how risk-averse or risk-hungry the data is suggesting investors are for the U.S. equity market.
One tool I use to accomplish this and one of the components that feed into my Risk Appetite Index is the relative performance of High Beta stocks to the S&P 500. When risk appetite is high, we typically see higher beta stocks outperform the broad market, which makes sense—more bullishness sends traders to chase after the higher volatile components of the index.
This causes the correlation between the ratio of High Beta and the S&P 500 to remain relatively high when the index is in a positive trend. However, that relationship has broken down in recent weeks. In fact, high beta stocks are no longer outperforming. It’s not due to a lack of exposure to the stronger corners of the market, the Invesco S&P 500® High Beta ETF (NYSE:SPHB) is 45% tech and its largest holdings are Advanced Micro Devices (NASDAQ:AMD), NVIDIA (NASDAQ:NVDA), Micron (NASDAQ:MU), and Western (NASDAQ:WDC), so it’s not because tech is leaving the ETF behind.
Instead it’s showing that traders are becoming more risk adverse during this latest move higher in the broad market. This has sent the correlation to the lowest level since during the Q4 ’18 sell-off.
A bearish divergence like this is not a common characteristic of a healthy equity market risk appetite. Instead it suggests maybe the market has gotten a little bloated and needs to digest the gains it’s already realized and thus is moving away from the high beta stocks that it so loved just a few months ago.
Disclaimer: Do not construe anything written in this post in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned.
Get The News You Want
One tool I use to accomplish this and one of the components that feed into my Risk Appetite Index is the relative performance of High Beta stocks to the S&P 500. When risk appetite is high, we typically see higher beta stocks outperform the broad market, which makes sense—more bullishness sends traders to chase after the higher volatile components of the index.
This causes the correlation between the ratio of High Beta and the S&P 500 to remain relatively high when the index is in a positive trend. However, that relationship has broken down in recent weeks. In fact, high beta stocks are no longer outperforming. It’s not due to a lack of exposure to the stronger corners of the market, the Invesco S&P 500® High Beta ETF (NYSE:SPHB) is 45% tech and its largest holdings are Advanced Micro Devices (NASDAQ:AMD), NVIDIA (NASDAQ:NVDA), Micron (NASDAQ:MU), and Western (NASDAQ:WDC), so it’s not because tech is leaving the ETF behind.
Instead it’s showing that traders are becoming more risk adverse during this latest move higher in the broad market. This has sent the correlation to the lowest level since during the Q4 ’18 sell-off.
A bearish divergence like this is not a common characteristic of a healthy equity market risk appetite. Instead it suggests maybe the market has gotten a little bloated and needs to digest the gains it’s already realized and thus is moving away from the high beta stocks that it so loved just a few months ago.
Disclaimer: Do not construe anything written in this post in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned.
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.