Have Traders Been Adding Beta During the Recent Drop in Equities?

Now that we have wrapped up August traders are beginning to prepare for the potential whipsaw that could be September. The market has a lot to digest this month between Middle Eastern conflicts, the debt ceiling, discussion of the next Fed chair and whether the Fed will taper or keep the fun times rollin’. In August we had a slight correction in equities, but so far the drop in price has been healthy and was somewhat expected at the elevated level of 1700 on the $SPX.

One chart that I’ve found interested over the last few weeks is the relationship between the PowerShares S&P 500 High Beta ETF ($SPHB) and the PowerShares S&P 500 Low Volatility ETF ($SPLV). Typically during up moves in equities we see the High Beta ETF outpace the Low Volatility ETF as traders take on more risk within their portfolios. We can use the relationship between the two to look for confirmation in the price action we see in the overall indices.

What’s interesting is the move that took place between $SPHB and $SPLV as equity prices dropped. As the chart below shows, we actually saw a relative outperformance in the High Beta ETF while the S&P 500 corrected nearly 5%. With the relationship between $SPHB and $SPLV as a way to gauge the ‘risk taking’ of the market, does this mean traders are adding beta to their portfolios on recent weakness? Could be. We’ll see going forward if High Beta breaks its short-term rising trend and ends its divergence or if the market puts in a floor and begins to follow the move we are seeing in today’s chart.

high beta

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About Andrew Thrasher, CMT

Andrew Thrasher, CMT is a Portfolio Manager for an asset management firm in Central Indiana. He specializes and writes about technical analysis as well as macro economic developments.