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US Large-Cap Stocks Correlation and Dispersion Supports Active Stock Picking

Mar 04, 2019

Better Data for Better Investment DecisionsBetter Data for Better Investment Decisions
Better Data for Better Investment DecisionsBetter Data for Better Investment Decisions

 

  • After our post last week, “Passive Funds Continue to Steal Spotlight from Active Funds. Can Active Management Make a Comeback?,” discussed that total assets under management (AUM) of passively managed US large-cap ETFs surpassed AUM of actively managed US large-cap ETFs for the first time in history in 2018, we are taking a look at 1-month realized pairwise correlations and 1-month average dispersion of stocks in the Quantamize US Large-Cap Universe to understand if the current US large-cap stock market environment should favor an indexing strategy or an individual stock picking strategy.
     
  • As can be seen in the chart below, we outline the 1-month realized pairwise correlations and 1-month average dispersion of stocks in the Quantamize US Large-Cap Universe dating back to April 28th, 2014.

 

Source: Capital IQ
 

  • After a highly correlated start to 2019 for the Quantamize US Large-Cap Stock Universe with correlation levels touching a 5-year high of 0.592 on January 14th, 2019, correlation levels consistently fell lower through the month of February to near 5-year lows.
     
  • Correlation of the Quantamize US Large-Cap Stock Universe is currently muted with 1-month realized pairwise correlation calculated as 0.092 as of March 1st, 2019 close, just off its 5-year low of 0.033 reached on November 13th, 2017.  
     
  • Current low levels of correlation in US large-cap stocks should work to favor an individual stock picking strategy over an indexing strategy.
     
  • Dispersion of the Quantamize US Large-Cap Stock Universe is currently at a moderate level with the metric fluctuating slightly above and below 10% since the start of 2019. As of March 1st, 2019’s close, dispersion of the Quantamize US Large-Cap Stock Universe is calculated as 10.56%. 
     
  • The average dispersion of the Quantamize US Large-Cap Stock Universe dating back to April 28th, 2014 is calculated as 9.44%. 
     
  • Moderate levels of dispersion in US large-cap stocks that are slightly above its 5-year average suggest that it may be beneficial for investors to favor an individual stock picking strategy over an indexing strategy. 
     
  • Just as a sidenote, dispersion measures the average deviation between the individual stock returns of the Quantamize US Large-Cap Stock Universe. 
     
  • Low levels of correlation paired with moderate levels of dispersion imply that the current environment for US large-cap stocks is one that favors individual stock picking over a passive management strategy. 
     
  • If you are interested in individual stock ideas with a 1-month to 2-month horizon, you can check out our Quantamize Stock Research Reports here, where we highlight the most individual attractive opportunities in our AI Multi-Factor Stock Models every day! Today we highlighted names like Kforce Inc. (KFRC) and Buckeye Partners, LP (BPL).

 

 

Global Top Stock IdeasTOP LONG & TOP SHORT STOCK IDEAS FOR GLOBAL MARKETSMONTHLY TOP IDEAS FROM OUR MULTI-FACTOR QUANTITATIVE MODELS
Global Top Stock IdeasTOP LONG & TOP SHORT STOCK IDEAS FOR GLOBAL MARKETSMONTHLY TOP IDEAS FROM OUR MULTI-FACTOR QUANTITATIVE MODELS