Good News For Stock Pickers

[Billy]

It’s been a while since I haven’t shown the updated CBOE implied correlation index graph.

It is currently in a panicky climaxing freefall, indicating that large hedge funds have definitely turned away from overall market protection (with falling correlation among put premiums/volatility for all stocks). The last rush down suggests that the late hedging bears have now capitulated for good. From a contrarian perspective, it might even raise some concerns.

But this is the ideal environment for stock pickers, especially for momentum, relative strength and CANSLIM-type investors. The low implied correlation reflects the shift in strategy by large funds to concentrate more risks on individual leading stocks and less on ETFs and market indices.
Billy

[EB]

We might even see an end of quarter window dressing rush into leading stocks, as fund managers need to demonstrate they are in the "right" issues. The dogs are fixed income and hedges. From this perspective, current trends might last into the end of the week.

[brrim]

An intermediate term view of 20 DMF shows it is approaching the down trendline that started on 10/24/11. RT MF is currently 0.60%. The trendline sits at around 0.68%.
Best regards,
Robert

[Billy]

An intermediate term view of 20 DMF shows it is approaching the down trendline that started on 10/24/11. RT MF is currently 0.60%. The trendline sits at around 0.68%.
Best regards,
Robert

Thank you for sharing, Robert. This is an interesting development with IWM price supported by a nearby intermediate term trendline, while money flow seems bounded by a declining trendline.

A breakout of 20 DMF above the line would of course confirm a continuation of the current rally. But it also suggests that more money can be made now in a basket of individual leading stocks and with a better reward/risk outlook than when investing in market indices. Indeed, an interpretation of the divergence between price and MF could be that the rally is mostly fueled by a small percentage of the stocks included in the 20 DMF and that these leading stocks are coming from too many different sectors, so that the 20 DMF has some difficulty with its sector rotation algorithm compared to recent history.
Billy