04 November 2009

How do you know a Beta Bear from a Beta Bull?

Not by looking at the averages. The market goes up and down. It trends. It's choppy. If you try to pick the market's direction strictly by looking at yesterday's averages you will break even at best. Before transactions costs.

However if you look inside the market and look at the relative performance of risky vs safe stocks you find something interesting. Investors tend to favor either risk or safety for extended periods of time; for example the risk bet that lasted from March until September. Generally although not always the market averages correlate with the relative performance of high risk stocks. Like today!

We look at several factors and the performance within the SP500 specifically market cap (bigger is safer), beta (lower is safer), Ford's PMO i.e. Price Momentum (higher is safer) and Fords VMO i.e. Value Momentum (higher is safer). If you check back to earlier posts you'll see how various factors have described the market's performance. It's been a good way to look at the market. It's the best way.

Today High risk names are winning VMO - 53 bps (means the 50 highest VMO are underperforming the 50 lowest VMO by 53 bps) PMO - 66bps, Beta - 114bps and Small Cap - 104 bps. This is on top of yesterday's reversal from safety to risk.

Here are some charts. It looks like they are betting against health care reform again.

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