The high Beta stocks switching to risk off could now be playing out.
But what does high beta stocks switching to risk off actually mean?
Here, Darren Winters takes you through this one step at a time.
Beta is the second letter of the Greek alphabet, it is also a second-class mark given for a piece of work or examination and it is the latter definition that gives us a clue. Beta, in financial market speak, is a measure of stock’s volatility in relation to the market.
So by definition, the market has a Beta of 1.0, and individual stocks are ranked according to how much they deviate from the market. A stock that swings more than the market over time has a beta above 1.0.
High beta stocks switching to risk off means that investors traders are avoiding, shunning volatile stocks
So high beta stocks switching to risk off could also mean that risk capital might now be gravitating towards value rather than growth stocks.
In Darren Winters’s years of successfully trading the financial markets and taking on apprentice traders, I can say from experience that no trader has survived the longevity test without using some quantitative models. These risk models have either been taught to them by a successful trader or on other rare occasions they have through their own trial and error developed their own risk models over many years of trading. Professional trading is like a competitive sport and you will find that just like professional sports-people most top traders also have mentors and coaches to keep them disciplined and focused.
So back to the high beta stocks switching to risk off this too is a quantitative model (a traders compass) which helps the trader/Investor navigate risk in the financial markets.
The high beta stocks switching to risk off is just one example of a quantitative model
There are, for example, other indicators which traders/investors monitor and use to determine “risk-on” vs.“risk-off” situation in the market.
In short, high beta stocks switching to risk off and other models are useful tools for investors/ traders to gauge the potential strength or durability of market rallies.
Moreover, one such risk-on indicator can be found in the“high-beta” area of the market – especially in its behavior relative to “low-volatility” stocks.
To monitor these groups, traders/investors use the Invesco S&P 500 High Beta ETF (SPHB) and the Invesco S&P 500 Low Volatility ETF (SPLV).
Market watchers have noted that when the ratio of SPHB to SPLV performance is rising (e.g., 2012-2015, 2016-2018), it is an indication of “risk-on” – and constructive for the prospects of the overall market. The converse is true when the ratio turns lower (e.g., 2011, 2015-2016), we’ve found the opposite message to be true, i.e., “risk-off”.
Darren Winters sums up the chart in a few words, “it indicates is that the Beta stocks switching to risk off could now be playing out. But whether this trend continues going forward time will tell”.