Year-to-date inflows for High Beta funds is through the roof
If you've been around the block with us, our contrarian indicators are nothing new. Using a time-tested combination of expectational and quantitative analysis, contrarian thinking has driven Schaeffer’s trading philosophy for nearly 40 years. But that doesn't mean other performance factors are blatantly disregarded. In fact, during times as volatile as these, there should be even more of an emphasis placed on leaving no stone unturned. As investor optimism reaches near-euphoric levels, is "high beta" perhaps the indicator to watch going forward?
The most powerful performance "factor" over the past month hasn't been the small cap Russell 2000 Index (RUT), but instead "high beta, " or stocks that exhibit greater volatility than a broad market index such as the S&P 500 Index (SPX). The Invesco S&P High Beta (SPHB) sits in the number one position by a large margin in a ranked performance of the more popularly traded broad market index exchange traded funds (ETF). The fund also seems quite welcoming to names in a wide array of sectors, including energy, financial services, and cruise lines, with respective stocks Devon Energy (DVN), Discover Financial (DFS), and Carnival (CCL), in particular focus.
A look at daily year-to-date (YTD) fund flows shows their entire YTD inflow of $400 million plus just occurred over the October - November period. For context, SPHB's assets under management comes in at $712 million. This flourish leaves open the possibility of a massive amount of additional inflows, which in turn creates a "halo effect" of sorts for the top holdings. It sets up the already-successful fund for a flourishing finish to 2020.
There's a lot more to unpack here, especially when factoring in high beta’s counterpart low beta. On Friday, the high-beta/low-beta ratio chart broke out from the past decade-long resistance level. In the ensuing days, the question then became; will the ratio breach the prior resistance levels once more, or will that area now serve as possible support going forward? We now know that, thanks to Schaeffer's Senior Market Strategist Matthew Timpane, high-beta/low-beta ratio "successfully backtested the breakout on the daily chart at the beginning of the week. Giving high-beta plays the potential to recommence higher into the holiday season."
Compare such a signal to two others that popped up this week. According to the American Association of Individual Investors (AAII), for the first time since late March, the 10-week average of bullish sentiment is now higher than the ten-week of bearish sentiment. Meanwhile, the S&P 500 closed 16.26% above its 200-day moving average on Wednesday, its most elevated since December 2009.
With all of this feel-good optimism bubbling over, it's astute to take a step back and remember that risks are always imminent. The vaccine optimism that drove recent sentiment higher could run into logistical issues. Political gridlock in Washington D.C. is always a threat. In December of 2019, did anyone think that we'd be in the midst of a global pandemic? So, while market sentiment continues to show signs of euphoria as referenced above and below, a pullback could always be waiting around the corner. Thus, in lieu of tying up cash with share purchases (or accepting the steep risk profile and margin requirements of selling shares short), one can reduce cash outlay and overall market exposure through the purchase of options, while still participating in a stock's directional movement.
Subscribers to Bernie Schaeffer's Chart of the Week received this commentary on Sunday, December 6.