Barclays Quant Strategy: "Mispricings In The Market May Be Beginning To Take Root"
Barclays' head of quantitative strategy Matt Rothman provides some additional information on one of the most notable facets of the current market regime, namely the record implied correlation and thus, near record low stock dispersion, in other words, the phenomenon that all stocks trade as one, regardless of fundamental differences across different publicly traded companies. While nothing a slight dip in 1 month implied correlation from all time records near 70% hit in the past month, Rothman observes that "low levels of stock dispersion generally correspond with difficulty in picking individual stocks...This high level of cross-sectional correlation also has implications for how certain characteristics are being priced. For if stock return dispersion is low but underlying fundamental (economic) performance of factors remains relatively constant then it would appear that mispricings in the market may be beginning to take root." In other words, as we noted last time we observed the record low stock dispersion a month earlier, alpha (continues to be) dead. Yet for those who are eagerly anticipating the dispersion to finally rise, Rothman says that the market is basically back to mid-2009, when high quality stocks were largely undervalued compared to low quality: "High Quality companies are cheap right now relative to low Quality companies. We believe this is due both to a compression of returns in the market and because of the current macro-economic environment that has favored lower Quality stocks." Of course, shorting high beta names in a Fed-mediated market, has led to nothing but implosion.