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 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 ($SPHB) is 45% tech and its largest holdings are Advanced Micro Devices (AMD), NVIDIA (NVDA), Micron (MU), and Western Digital (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 or this blog 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 in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.
