One of our themes of 2012 so far has been the “Dash For Trash” — the aggressive buying of the badly beaten down assets from last year, whether they be banks, junior gold miners, Italian bonds, or Egyptian stocks. All have been getting bought up like wild.
What does it mean?
SocGen makes an interesting observation about the surge of the high-beta names (not technically the same thing as the dash-for-trash, but close)
The spread between high and low beta equities has also been very wide. When measured using deciles, we find a spread of around 15% in the US, and a remarkable 20% gap in Europe. Over the last 22 years we have only recorded such a wide spread in Europe on two other occasions – in October 2002 and in March/April 2009.
This isn’t necessarily bullish, however.
While the strong performance of high beta names may indicate a potential bottoming out of equity markets, we have seen numerous occasions in the US where the spread has been wider than the current 15% and where the equity market continued to trend lower. Notably almost all these bear market beta rallies coincided with an interest rate cut from the Fed.
Meanwhile, this is an interesting chart from Nomura, showing the decline in implied volatility (red line) vs. the a basket of “high-risk” stocks (grey line, inverted). As you can see, the grey line hasn’t caught up to the red line, suggesting more strong performance for the risk basket.