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Charting The End Of 'Stock-Picking' Alpha

Tyler Durden's picture




 

We recently commented in detail on (and often discuss) the extreme high correlations across not just asset-classes but across all individual stocks. As Goldman notes today correlations across equities reached new record high levels during the financial crisis and remain extremely elevated compared to long-run averages. There are both structural (for instance, the dramatic rise in popularity of ETFs) and cyclical drivers (for instance, the severity of the great recession and the ongoing deleveraging in developed economies which maintains a high risk of another recession given the lack of fiscal and monetary flexibility) that are causing this shift. This high level of equity correlations has huge implications for the investment community as opportunities for diversification are significantly reduced and adding value by stock-picking is reduced (as evidenced by the notable drift lower in long/short hedge fund performance). This introduces a chicken-and-egg problem with regards to the growth in index investing and trading - while it has likely contributed, it is more likely a symptom than the cause of higher correlations. With currently elevated macro risks investors have a better chance to generate alpha by focusing on 'trading' and picking equity indices rather than stock-picking. Only with a sustained improvement in macro conditions are equity risk premia and correlations likely to decrease.

 

Equity correlations in developed markets reached new highs since the “Great Recession” and have stayed elevated since then.

 

S&P 500 1-month rolling correlations exhibit some seasonality—they drop at the beginning of the year and during earnings seasons.

S&P 500 ETF values traded are much larger compared underlying cash equity values traded for the index.


More focus on macro investing—higher ETF and index trading volumes might be symptom rather than the cause of higher correlations. Equity correlations are driven by current macro conditions and risks.

Traditional stock-picking (or alpha generation) can get more difficult with higher equity correlations. Equity long/short hedge funds tend to perform less well in periods of high correlations.

With currently elevated macro risks investors have a better chance to generate alpha by focusing on trading and picking equity indices rather than stockpicking - especially with ETF volumes now dominating individual stock volumes!

 

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Thu, 06/28/2012 - 18:07 | 2571341 Xibalba
Xibalba's picture

no markets, only interventions

Thu, 06/28/2012 - 18:16 | 2571354 LowProfile
LowProfile's picture

FUCK YOU, BLANKFIEND!!!

Thu, 06/28/2012 - 18:16 | 2571356 veyron
veyron's picture

<-- still has alpha

 

recommended buying ARNA at 2.40 up to approval, more than 400% up

Thu, 06/28/2012 - 19:07 | 2571475 GlassSteagall
GlassSteagall's picture

Intervention and a little Intercourse

Thu, 06/28/2012 - 18:09 | 2571345 BORT
BORT's picture

The only way to be successful at stock picking is to have a friend on the board, with a fast smart phone. just saying

Thu, 06/28/2012 - 18:16 | 2571355 HaroldWang
HaroldWang's picture

And the morons keep coming on and calling for 1450, 1500, etc. EOY SPX. "Stocks are cheap on p/e basis", they say. 

Are these people really this idiotically stupid?? When the "e" comes down (ask NKE, F, BBBY, etc.), stocks ain't no longer cheap.

If this market made any sense whatsoever, /ES would be down huge right now after the horrific forecasts AH. But nope, European candy still feeds this baby. And the morons over here keep thinking somehow this major clusterfest won't hurt US equities. 

One thing is for certain, it's gonna be one ugly earnings season.

Thu, 06/28/2012 - 18:23 | 2571380 bdc63
bdc63's picture

"One thing is for certain, it's gonna be one ugly earnings season."

It is certainly starting to look that way. Except for JPM of course ... Jamie said they are going to have "solid" earnings numbers for the quater ...

Thu, 06/28/2012 - 18:54 | 2571444 GlassSteagall
GlassSteagall's picture

ES should be down bigtime because SCOTUS upheld 974 pages of "Lets pass this bills so we can see what's in the bill"

Thu, 06/28/2012 - 19:47 | 2571592 you enjoy myself
you enjoy myself's picture

dude, 2700 pages.  not a single elected representative knows or understands what's in the bill.  and even worse, even if they did read it and could comprehend it, its literally unknowable at this stage - it contains hundreds of references to “as shall be determined by the Secretary of the HHS”.   and the HHS still has to do a ton of determining.  businesses won't be hiring for years until this shit is figured out.

Thu, 06/28/2012 - 18:17 | 2571365 GlassSteagall
GlassSteagall's picture

If July correlation holds, we're in for a good correction

Thu, 06/28/2012 - 18:21 | 2571379 TraderTimm
TraderTimm's picture

I'm disgusted with the market EOD ramp and other things, so I'll just put this here:

----------

Will: It's not the greatest country in the world, professor, that's my answer.

Moderator: [pause] You're saying—

Will: Yes.

Moderator: Let's talk about—

Will: Fine. [to the liberal panelist] Sharon, the NEA is a loser. Yeah, it accounts for a penny out of our paychecks, but he [gesturing to the conservative panelist] gets to hit you with it anytime he wants. It doesn't cost money, it costs votes. It costs airtime and column inches. You know why people don't like liberals? Because they lose. If liberals are so fuckin' smart, how come they lose so GODDAM ALWAYS!

And [to the conservative panelist] with a straight face, you're going to tell students that America's so starspangled awesome that we're the only ones in the world who have freedom? Canada has freedom, Japan has freedom, the UK, France, Italy, Germany, Spain, Australia, Belgium has freedom. Two hundred seven sovereign states in the world, like 180 of them have freedom.

And you—sorority girl—yeah—just in case you accidentally wander into a voting booth one day, there are some things you should know, and one of them is that there is absolutely no evidence to support the statement that we're the greatest country in the world. We're 7th in literacy, 27th in math, 22nd in science, 49th in life expectancy, 178th in infant mortality, 3rd in median household income, number four in labor force, and number four in exports.

We lead the world in only three categories: number of incarcerated citizens per capita, number of adults who believe angels are real, and defense spending, where we spend more than the next twenty-six countries combined, twenty-five of whom are allies.

None of this is the fault of a 20-year-old college student, but you, nonetheless, are without a doubt, a member of the WORST-period-GENERATION-period-EVER-period, so when you ask what makes us the greatest country in the world, I don't know what the fuck you're talking about?! Yosemite?!!!

[Cell-phone cameras are raised everywhere in the audience - people are texting away in reaction to his words.]

We sure used to be. We stood up for what was right! We fought for moral reasons, we passed and struck down laws for moral reasons. We waged wars on poverty, not poor people. We sacrificed, we cared about our neighbors, we put our money where our mouths were, and we never beat our chest.

We built great big things, made ungodly technological advances, explored the universe, cured diseases, and cultivated the world's greatest artists and the world's greatest economy. We reached for the stars, and we acted like men. We aspired to intelligence; we didn't belittle it; it didn't make us feel inferior.

We didn't identify ourselves by who we voted for in the last election, and we didn't scare so easy. And we were able to be all these things and do all these things because we were informed. By great men, men who were revered. The first step in solving any problem is recognizing there is one—America is not the greatest country in the world anymore.

Will: [to moderator] Enough?

 

Thu, 06/28/2012 - 18:56 | 2571448 Flakmeister
Flakmeister's picture

Worst Investing environment in my lifetime.....

Churn and Burn... shit like naked shorts and BenCo throwing fucking curveballs....

Solid companies getting savaged (e.g. US Silver, Iamgold), what is one to do....

Thu, 06/28/2012 - 19:02 | 2571457 ZeroAvatar
ZeroAvatar's picture

Go ahead and pick any stawk you want.  Fundamentals, technicals don't matter anymore. The entire world-wide multi-trillion dollar rigged casino referred to as the 'stock market' awaits every whispered word from the lips of one man, and ONE MAN ONLY-Berskanke. That one man can decide the financial future of the globe is abhorrent.

Thu, 06/28/2012 - 19:05 | 2571469 GlassSteagall
GlassSteagall's picture

Try RIMM

 

 

 

 

Sent from My Blackberry

Thu, 06/28/2012 - 20:22 | 2571690 overmedicatedun...
overmedicatedundersexed's picture

the ultimate kick the can ..GOPskunks and Demorats will still be at it years from now and the small businessmen will not know what reg,tax or rule comes next..much like immigration kick the can both sides do not want answers they want the turmoil to feed the base. 

Thu, 06/28/2012 - 21:20 | 2571867 geewhiz190
geewhiz190's picture

ZH should continue to delve into the ETF market and how it operates. it may go along way towards exposing just how distorted and really disconnected the equity markets may have become because of what appears be a form of Frankenstein like creation-the ETF

Thu, 06/28/2012 - 22:43 | 2572088 slewie the pi-rat
slewie the pi-rat's picture

Equity correlations are driven by current macro conditions and risks.

after the chicken-egg X 2not caused but "driven"?

imo this does not mean the macro situ is riskier in any objective sense, just that the current 'price structure' does not invite risk-taking

and yet there are those, today, who went after the non-existent alpha and got it in hospoital stocks

they stock-picked and maybe got ready just in case?

maybe found an insurer or 2 that might "win" if the law was struck down, and just waited to see which orders to enter?

too simple?  no, but this is the exception that proves the rule, too

we seem to get one or two every day;  we get a nice risk0ff day and the grains rally?  we didn't dream that, ya know!

you'll see the mole pop up to get whack-a-'d;  but if there aren't enuf of them popping up frequently enuf, it isn't a worthwhile game to be betting or buying into for chances

ordinarily, that sucks, and even i can understand why.  i think.  one ya squeeze all the juice outa the orange, there's no more juice left in the fuking orange!

however, if ya squeezed it onto panites and thighs, you could still enjoy the juice

now that might not be alpha, but it is still some tasty action

besides, oranges aren't silver or oil;  they actually grow on trees...

Fri, 06/29/2012 - 06:29 | 2572557 maxcody
maxcody's picture

Four more months! Nobama 2012

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