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Another Measure of Dispersion Points to Payoff from Buying US Large-Cap Stocks

Mar 05, 2019

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

 

  • Yesterday, we published a market insight titled, "US Large-Cap Stocks Correlation and Dispersion Supports Active Stock Picking" that dives into daily correlation and dispersion trends for the Quantamize US Large-Cap stocks universe going back to 2014.  We conclude that it makes sense for investors to buy stocks vs. simply buying ETFs in the current environment.
     
  • Today, we do a new study of dispersion and measure monthly returns for the Quantamize US Large-Cap Universe going back to early 2014.  Dispersion is calculated as the average deviation between the two 1/3 of stocks in the Quantamize US Large-Cap Universe versus the bottom 1/3.  Our goal is to see whether a different measure of dispersion helps us better understand the price behavior of stocks in the Quantamize US Large-Cap Universe.
     
  • Remember that dispersion measures the average deviation between the individual stock returns.  It is a more accurate measure of the differentiation of stocks returns.  A high level of dispersion suggests there is a significant payoff for investors to “pick individual stocks”.
     
  • The chart below suggests that while dispersion level are not at the same levels as November 2018, they are well off December 2018’s lows
     
  • Notably, each subsequent trough point going back to July 2018 is increasing which suggests the overall trends for this measure of dispersion is moving upward 

 

  • What is the takeaway and why do you care?  Our conclusion is quite simple: the payoff for investors to buy stocks is increasing.  Of course, investors should be careful when buying stocks but the payoff from owning individual stocks vs. simply buying an ETF increasing.  

 

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