There was some unusual activity in the stock market today. It was a risk off risk on type of session.
The S&P 500 was up more than 4%, but some of the market internals didn’t exactly scream everybody back in the pool.
Stocks have grabbed all the headlines over the last ten days, but the move lower in interest rates was arguably more extreme, with the 10-year falling from 1.57% to 1% over that same time.
The move in rates has had a big impact on stocks, especially this week.
Because bond yields have all but disappeared, investors have been buying stocks with a decent coupon. As a proxy for this group, I’ll be using SPLV, the low volatility ETF that is 45% utilities and REITs. You would expect to see defensive stocks, like the one in this ETF, outperform in a defensive tape, not on a day when the S&P 500 gains 4%. SPLV outperformed SPHB, the ETF that tracks high beta names, by almost 2% today. The last time low vol outperformed high beta to this extent on a day when the market was up big was Monday. Before that was never. So something that we’ve never seen prior to this week happened in two of the last three days*.
Let’s relax the assumptions to get a bigger sample size. If we screen for days that the S&P 500 was up 1% and the low vol outperformed high beta by 1%, that increases it to…4 times. The other two times was in June 2016 and December 2015.
What if we invert? How often does high beta outperform low vol by 1% when the market gains 1%? 120 times. How many up 1% days have there been for the S&P 500 over this time? 238. So when the S&P 500 gains 1%, there is a 50% chance that high beta outperformed low vol by 1%. And that is what makes the moves over the last two days so unusual.
I don’t want to make too much out of a data mining exercise with a small sample size, but its clear that rates are the story here just as much as stocks. And with defensive names leading the charge since the lows, it’s hard to be too confident that the selloff is over. Of course there could be a rotation back into the higher beta names tomorrow, making this a moot point. We shall see.
*These ETFs came out in 2011.