Bailout

Those outperforming junk stocks

By Felix Salmon

There are lots of tools that investors use to try to outperform the stock market. Some use fundamental analysis, looking for stocks which are cheap. Others just want to buy high-quality qualities. And traders often want to buy stocks which are rising, playing the momentum.

In March, it seems, none of that worked, at least if you were using BarCap’s quant model:

Market Sentiment did not work, returning -4.37%. Quality did not work, as low Quality companies beat high Quality companies, thus underperforming by -2.83%. And Valuation didn?t work either, with expensive companies outperforming cheap companies, causing the theme to return -1.99%. None of the traditional styles for stock picking worked. One needed to be absolutely counter-intuitive buying expensive stocks of low quality that had recently underperformed to be successful.

I guess in retrospect the trick was to see the significant increase in risk appetite which happened in March, and then go long anything considered high-risk. Like expensive stocks of low quality that had recently underperformed. But I wouldn’t try that at home. And neither would I consider one-month stock performance to be an indicator of corporate or managerial quality.

More generally, this kind of thing gives lie to most market reporting, and the conceit that market moves happen for a reason. Insofar as they do, often that reason is so abstract — something like what Paul Murphy calls “the risk trade being put back on” — that it can never really be identified at the time. And even in retrospect, it looks more than a little random.

Full post as published by Macroprudential on April 07, 2010 (boomark / email).