Beta, Meet Alpha

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  • on May 18th, 2011

I’ve spent the last few weeks racking my brain to find the themes on which to guide my allocations.  While the hare to tortoise movement is alive and well, I now feel the other theme is that there is no theme…the era of monolithic moves might be taking a break.  The chop we’ve seen for the past few weeks has ushered out the beta trade and brought in the alpha trade.

I have no clue what the $SPX wants to do and feel less of a need to capture its “next big move”.  Instead of broad rallies that set the table for broad retracements followed by broad rallies, we’re seeing a greater willingness for individual stocks and sectors to find their own support and resistance levels.  I think this explains why the obvious technical breaks on the indices lack bite; more of a reshuffling than a rush to escape and extrapolate.

I’m seeing odd things in the following measures that have shown consistent oscillations over the time that I’ve tracked them:

1) % Above 10 Day MA- narrowing extremes on market swings indicates less emotion. Instead of reaching levels below 15% on a downswing and above 85% on an upswing, we’ve been getting much more moderation.

2) % Trending Up/Down/Sideways- instead of a balanced mix of trends and ranges, the last month has shown a barbell effect with lots of emerging uptrends and downtrends but a lack of sideways patterns.

3) AlphaScanner- scattered clusters in Stage Analysis, with equal pockets of stocks being marked up AND marked down.  This further illustrates how hard the rotation has been out of old momentum and into new areas.

Taking these subtle signs in my work, plus the not-so-subtle differences in performance by industry competitors like $HD(good) vs. $LOW(not so good), or $DELL vs. $HPQ, and a picture comes together of a much-welcomed “Stock Pickers Market”…long rumored but not seen in some time.  I would think this would be a welcome development for anyone but closet indexers; a chance to put our best ideas to work with less fear of being trampled by the giant “Risk On/Risk Off” monster.  Sell rallies after a few days, buy dips.  Own your favorite stocks, short the ones that don’t look right.  Novel concept, eh?

After a long break from pairs trades, I’ve begun creating trades to exploit the stocks I like against the stocks I don’t.   I’ve become accustomed to a highly correlated market that prefers macro thinking to micro, but this change in tone to a more rotational, more divergent market seems for real this time.  We may continue to be driven by events from all over the globe carrying way more bark than bite, but the drug that is “macro news” seems to be losing its ability to create fear in both directions.  There are WAY too many slowly emerging patterns, both good and bad, to worry about where $SPY or $IWM are heading; far better to use fleeting swings for better trade location.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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