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Could be a germ of an idea here:
https://robotwealth.com/revenge-of-the-stock-pickers/?pa=CEF...

"When an ETF sells off on high volume, correlations among its constituents tend to increase, often quite significantly.
During normal times, some constituents have lower beta to the ETF than others,
but during significant sell-offs, these low-beta constituents get dragged down along with the ETF,
regardless of their own idiosyncratic exposure to whatever caused the sell-off.
The authors hypothesise that such throwing the baby out with the bathwater can lead to temporary mispricings upon which stock pickers can capitalise."
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No. of Recommendations: 5
I can see a problem here:
If those stocks are all exhibiting high beta, how to you spot which ones "ought" to be low beta?
Fund trading has dominated individual stock trading for a while now.

They're all quacking like high beta ducks.

Jim
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No. of Recommendations: 5
"When an ETF sells off on high volume, correlations among its constituents tend to increase, often quite significantly.
During normal times, some constituents have lower beta to the ETF than others,
but during significant sell-offs, these low-beta constituents get dragged down along with the ETF,
regardless of their own idiosyncratic exposure to whatever caused the sell-off.
The authors hypothesise that such throwing the baby out with the bathwater can lead to temporary mispricings upon which stock pickers can capitalise."


That seems quite obvious and was clearly in evidence across the whole market during this month's turmoil. Stocks were pretty uniformly down 30% during the dive to the 3/23 bottom. A week later, looking at the stocks that I track but no longer own, there is a wide divergence. The worst is down 55% for the month, the best is up 4% for the month.

Elan
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A week later, looking at the stocks that I track but no longer own, there is a wide divergence.
The worst is down 55% for the month, the best is up 4% for the month.


Without scientific rigour, this is one of the main reasons one might believe that the recent bottom might actually hold for a while.
At the moment, knock wood, the previous indiscriminate forced selling isn't in evidence at all.
And the unemployment figures were taken in stride.

I kind of expect fresh lows at some point, or at least wouldn't be surprised in the least.
But perhaps more in the manner of a typical long bad bear rather than a bowel loosening meltdown off a cliff.

Jim
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It's the stocks that have low beta on average that they're interested in (in a steep sell-off all betas and correlations basically go to 1).

Lifting from their post:
- Get some ETF historical price data - both for the ETF and its constituents
- Look at correlations between constituents during normal times and stressed times
- Calculate historical returns to low- and high-beta constituents and figure out if we have some alpha on our hands

They seemed to have some alpha, subject to the issues they already identified as problems (and presumably other problems they didn't identify).
Since I'm not great at picking individual stocks based on fundamentals, this seemed like it might have a germ of an idea for otherwise picking stocks.
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Since I'm not great at picking individual stocks based on fundamentals, this seemed like it might have a germ of an idea for otherwise picking stocks.

Even quant slates of low-beta stocks tend to do pretty well on average, so it's consistent with a screen strategy.
It's strongly correlated with the low-volatility advantage, but slightly different.

It does raise the issue of whether someone following any low beta strategy would be wise to skip those few periods of extremely high stock correlation when calculating beta.
Maybe it wouldn't make much difference because, almost by definition, all stocks would get the same size of penalty by including those stretches.

Jim
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And the unemployment figures were taken in stride.

The new claim figures we saw last Thursday are barely 1/10th of what we'll see in the coming month. People have to be blind not to understand that.

Elan
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The new claim figures we saw last Thursday are barely 1/10th of what we'll see in the coming month. People have to be blind not to understand that.

Agreed. Given that the Great Recession took the Labor Force Participation Rate permanently down by 4%, what's to keep this shock from taking it down another 4-6%? That's essentially back to the 50's, when women largely stayed home.
https://fred.stlouisfed.org/series/CIVPART
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