fbpx

Risk in the capital markets simply boils down to two varieties: idiosyncratic (asset-specific) and market risk (or Beta). The indicators below provide investors with a historical view of where the risk in the equity landscape is located. High component correlations with the index indicate a high degree of Beta risk, while low readings indicate a high degree of idiosyncratic risk. Across the equity landscape, risk has shifted from Beta to idiosyncratic as the major markets have rallied out of the June lows, which is a material shift in risk location compared to the March and May rallies of this year. While the major financial newswires cover the indexes ad nauseum, for money managers, paying more attention to the price action in the assets in their portfolios at these levels rather than the price action at the index level becomes prudent.  

ACCESS our full advisor toolkit for a deeper look at the markets including our MONTHLY call, CHART BOOK, small cap ideas, and more.

S&P 1500

As the S&P 1500 has rallied out of the lows from the 830 zone in late June, the percentage of index components highly correlated with the index has moved down from the highs above the 50% level to consistent prints below the 15% mark over the past several trading sessions as the one-month moving average of readings steadily declines. Note that this action is materially different than the March and May rallies of this year, which saw correlation readings consistently above their one-month moving average.

S&P 500

Much like the price action in the S&P 1500, the S&P 500 has rallied from the 3,650 zone in late June on consistently lower correlation prints as the metrics declining one-month moving average confirms the downtrend of readings. Here, too, the action is materially different than the March and May rallies in the index and the indicator.

S&P 400

As the S&P 400 has rallied out of the June lows at the 2,200 level, the percentage of components highly correlated with the index has consistently fallen as well. Again, not a materially different dynamic during this rally compared with that of March and May, when component correlations with the index were rising during the rally.

S&P 600

The S&P 600 has not been left out of the recent dynamic between higher prices in the index and lower readings in the percentage of components highly correlated with the index. However, this similar dynamic did play out in the month of May, unlike its larger index peers. Also of note is that March’s muted rally in the index printed relatively flat readings in the indicator, again diverging from the action from the S&P 600’s larger peers.

NASDAQ 100

While the NASDAQ 100 has not been left out of the recent dynamic of rising index prices and falling component correlations with the index, it does maintain the highest percentage of components highly correlated with the index at just over 40%. Additionally, while the indicator has been printing lower values from the index’s rally out of the June lows, it has been much less dramatic to the downside than its peers in the S&P indexes. Here too, we see a differing dynamic than in the March and May rallies, where correlation readings printed consistent values above its one-month moving average.

ACCESS our full advisor toolkit for a deeper look at the markets including our MONTHLY call, CHART BOOK, small cap ideas, and more.

Disclosure: This information is prepared for general information only and should not be considered as individual investment advice nor as a solicitation to buy or offer to sell any securities. This material does not constitute any representation as to the suitability or appropriateness of any investment advisory program or security. Please visit our FULL DISCLOSURE page.