The Russell's Ever Increasing Beta

The attached chart demonstrates just how much of a ramp the Russell 2000 has experienced in terms of its market beta since the March lows. A pretty convincing demonstration of just how many junk stocks have been purchased, most of them on forced short squeezes, which have in turn pushed the marginal buyer to be much less discriminate in lifting any and all offers, thus driving the overall market.

In summary: the IWM's beta Since March 6 has been 1.3, while its long-term beta has traditionally been about 1.09. Assuming the rules of mean reversion every apply, expect to see this increased beta translate into a more aggressive sell off once the former occurs (if ever, bizarro years are the new bizarro days).

Comments

[blackebitda]

is this holding expected return constant, such that your finding 

shows that risk has increased against expected return? more risk 

for less return? or is this more risk to get more return? normal probability 

belongs in a lab anyway. 

[Anonymous]

Are prices reverting to the mean, or is the mean CHANGEING and ADJUSTING to price? Implying 'mean reversion' seems to imply prices will fall because they have risen so high. An alternate view might say the mean will ADJUST to the price and not vica versa. Force is there and we know not when it will stop or change direction. But we can follow prices and averages and apply stops in case of a sudden force 'change of direction'.

[Anonymous]

This is the most idiotic thing I've read in a long time, thanks

[Ducky]

I think your dates on that are good. The long term starts out in '03. The R2K exploded taht year. A guy on the floor blew out betting on mean reversion that year. So including that year in your sample makes this year even crazier

[Anonymous]

A different theory as to why even junk stocks are getting bought. Since the engineered market ramp up was done basically with money provided by the fed, and for the purpose of keeping uneployment from increasing through the roof(as BB testified in congress as the purpose of creating the fed). It is only fair to assume that the agreemnt between the fed and the market "protectors",force them to protect everything(raise everything). the good,the bad and the ugly. More or less like the previous USSR. I would think that this is fair since the money is taxpayers money and is provided mainly to keep people employed(dosn't necessarily mean that I agree with policy as a long haul strategy)

[dnarby]

That is what they are doing, but by lifting the bad and ugly with the good, they are misallocating capital (throwing good money after bad, as opposed to letting capital naturally find where it is most likely to grow).

This will end in disaster...  But I have high hopes on the rebuild.

[Anonymous]

I remember at the end of both (80's, 2000) real estate bubbles, all the crappiest locations sold last. The small, almost condemned bungalows with the views of the town dump in their backyards, finally selling for big bucks.

[SteveNYC]

This is the one to short. Made a killing shorting it last year, an even better opportunity is approaching. Have a small holding of RWM slightly below purchase price at present, looking to really ramp into it at the first sniff of a sell-off. Long dollar trade to complement it.

Just my thoughts, good luck.

[curbyourrisk]

Would love someone to explain to me why DTG is up some 2000% off its low this year.  The company is a DOG, loaded with debt and constantly paying vigs to the banks to change the covenants on their facilities.  This stock should have went TITS UP!!!!!   Same goes for GGC, but thats another rant for another day.

[xslashf (not verified)]

I have a bad feeling on commodities. Sure medium term, long term fine, but next 12 months or so, I'm not so sure.

good articles; my newest bookmarked finance site ..http://www..
hat tip: finance news & finance opinions

[sboney]

From a blog that summarizes the WSJ of the same date in 1930:

Bulls encouraged by resistance to repeated bear efforts Saturday and Monday following explosive rise Friday; buying movement spread broadly across the market early. Major industrials strong including US Steel, GE, Westinghouse, as were major utilities and rails (Consol. Gas, New York Central). Steel news caused some irregularity, but good buying appeared on setbacks. Bond market firm; corp. and preferreds up; govts. steady; Dow 40 bond average at new yearly high of 96.61.

E. Johnson, former Pres. Victor Co. (merged with RCA), returns from trip to survey conditions in Europe; feels general US business recovery under way, will be comparatively rapid up to a certain point; thinks stock prices somewhere near bottom.

Conservative observers even more cautious than usual; believe recent rally due to oversold condition, and decline will resume when short-covering ends.

Something about history and rhyming comes to mind.

[Anonymous]

O.K but why asume that history repeats itself?no major events always occur in the same manner. My opinion is that the goverment(through market makers)will not let the market go through the same uncontrolled chaos(dosn't mean no chaos,but rather a controlled one) that was rampant sept 08-Mar 09. If for nothing,it is only to build people's confidence back in the stock market. For how long?untill wall st decide again that stocks are way too high and there is not enough profit to be made.

[max2205]

Pair TNA short SPY = 900% in 5 months...sweet

[ng2amarinefunk (not verified)]

yes, junk will 'realize' its value, soon, sooner is better actually - some of those medical/biologicals haven't made a penny in TEN years - liquidate them, all, forget your TEN bagger hopes, fools