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The Market's Measure
market's measure

Hi, Beta!

Volatility paid off big last week.

How’s that old saying about March go? In like a lion, out like a lamb?

That certainly held true for last week’s weather in most of the U.S. And it was true for our stock market as well. The SPDR S&P 500 ETF (NYSE Arca: SPY) gained 3.6 percent on the week, but was outdone by the 4.9 percent upturn for its beta-tilted cousin, the PowerShares S&P 500 High Beta ETF (NYSE Arca: SPHB)

We’ve examined SPHB before—the last time was in our February 27 article, “Did Low-Volatility Strategies Fail Investors?”—usually in contrast to its stablemate, the PowerShares S&P 500 Low Volatility ETF (NYSE Arca: SPLV). SPHB strips out 100 of the highest beta stocks from the S&P 500, while SPLV takes the opposite tack with 100 S&P components exhibiting the lowest volatility. Last week, SPLV lagged with a 3.4 percent gain.

When we put SPHB’s price in ratio to SPLV’s, we get a real-time measure of investors’ risk appetite. Whenever SPHB gains over SPLV—signified by a rising ratio—the taste for market risk becomes more keen. Beta was certainly a flavorsome treat last week as it has been since the February market break. Regard the rebound of the risk appetite indicator (in red) below. It’s climbed back to its pre-break level while the S&P 500 has yet to overcome its drawdown.

And it’s no wonder. Take a look at the stocks driving the S&P 500 and, by extension, SPY. SPY’s top five components earn an average 1.12 beta coefficient. SPHB’s top five come in nearly twice as hot with a mean 2.05 reading.   

So the question now is whether March and the market go out like lambs. Forecasting weather is always a dicey business but my Farmer’s Almanac calls for “unsettled conditions” in the Northeast as March winds down. The Almanac says nothing about stock volatility, however.

Despite the recent strength exhibited by SPHB, the high-beta ETF is technically weaker than SPLV in the long term. With a weekly close near the $48 level, SPLV is now aiming for a $54 to $55 price objective. That’s likely to be a drag on the risk appetite indicator. But the key for the near term is a break above the 0.95 level in the SPHB/SPLV ratio. A decisive spike would put risk-averse investors on the back foot and give a green light for fans of high-beta stocks such as Autodesk, Inc. (Nasdaq: ADSK), Micron Technology, Inc. (Nasdaq: MU) and Advanced Micro Devices, Inc. (Nasdaq: AMD).

Brad Zigler is WealthManagement’s Alternative Investments Editor. Previously, he was the head of Marketing, Research and Education for the Pacific Exchange’s (now NYSE Arca) option market and the iShares complex of exchange traded funds.

TAGS: Equities
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