Spot view:The view below is from one of the respected researchers on the street. So far we have seen a grind up in the S&P from 700 levels in March and we are still below last year September's levels around 1150. Personally, I am more concerned about either a grind up or a grind down. I think the Fed has propped up the economy so far but the data being released is mixed- negative (Housing/Durable goods) vs. some positive (consumer sentiment). So we are far from being out of the woods and I wouldn't be surprised if there were another slew of not so good data and a fall back to the 900s.
Vol view:Options traders might like selling short dated far out of the money calls although with VIX at 26-28 range. With the realized vol at 14%-15% and the implied vol at 26% -28% it seems smart to be short vol... However, I would only sell short dated vol- since I am still bearish and there may be a jump up in vol. Worth noting that if I sell short dated vol, I benefit from both the implied vol and the realized vol going down....depending on the instrument used
A persistent question since the March low and the large out-performance of higher beta stocks has been whether the beta trade has further to run? Is it time to rotate to quality stocks (lower beta)?We examine the relative performance of high versus low beta (quality) stocks historically. We do this first for the S&P 500 stocks unconstrained by sector membership, and then explicitly taking it into account. In the first exercise, we compare the performance of baskets of the 100 highest and lowest beta stocks in the index that are rebalanced monthly. In the second exercise, we constrain the baskets to include only the top and bottom quintiles for beta within each sector. History suggests the beta trade has further to run. In previous recoveries, the duration and magnitude of relative outperformance were longer and larger. Over the last two economic and equity market recoveries, from trough to peak the duration of high beta outperformance, was around 16m after both the 1991 and 2002 equity bottoms, compared with the current 7m run. As to magnitude, since 1992 relative performance of high versus low beta stocks has tended to converge to a fixed level. The long and severe underperformance from mid-2007 to early 2009 has meant that despite the substantial recent recovery, relative performance is still well short of this level But within sectors, the beta trade has run too far. When sector membership is explicitly accounted for, the same exercise indicates the beta trade has run too far. To be clear, we note that the recent trend has been for high beta out-performance within sectors but, in our reading, the magnitude of relative outperformance is overdone and thus argues for being cautious Strategy: The beta trade has further to run but look for beta outperformance from sectors not stocks. Stay overweight higher beta sectors, but higher quality names within sectors. On the view of a slow but continued economic recovery (DB economics forecast) that delivers significant earnings growth (our view), with forward equity multiples slightly below fair value, we see further upside for equity markets over the course of next year and maintain our 2010 S&P 500 target of 1260 set in May. A continued trend of beta outperformance but reflecting sector rather than stock beta argues for being overweight the high beta sectors. Who has the beta: by far the Financials; next are Materials, Consumer Discretionary, Industrials and Energy with similar levels; Tech has recently moved to low beta; Consumer Staples and Health Care remain the lowest. Our sector allocation remains in particular overweight the Financials and Consumer Discretionary sectors
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