The intra-stock correlation is at market extremes. Dispersion measures are also high, suggesting very little common movement across stocks. Put differently, idiosyncratic risk is high. This means that we should be in a stock picker’s dream. Investors who can see distinct differences in individual stocks will be rewarded, while those focused on common behavior will be disadvantaged. However, the ability to make money in this environment is not a given. Just because stocks do not move together does not mean the stock-picker can identify winners. It does not mean stock betas will go to zero, but it does mean alpha should be more dispersed and residuals from any market regression should be higher. The equal-weighted index has outperformed the cap-weighted SPX index for the year and over the last 3 months.
No comments:
Post a Comment