The Return of the Stock Picker’s Market!

The headline (including exclamation point!) is MarketBeat's. As is the story:

Investors herded together for safety at the peak of the financial crisis, driving normally disparate sectors of the stock market to move in near lockstep. Now, the herd mentality is dissipating. That means opportunity — and danger.

As markets became more volatile after the failure of Lehman Brothers almost one year ago, correlation across stocks reached highs not seen in decades.

Among the Russell 1000, implied correlation — a measure of how much stocks are moving together — cracked 50% several times during the financial crisis. The measure hit its most recent peak on March 31, when it reached 56%, according to numbers supplied by Barclays Capital.

Before the financial crisis hit, implied correlation hadn’t been that high since Halloween of 1987, in the wake of the stock market crash that year. Prior to that, the measure hadn’t been higher than 50% since 1962, when a great bear market pulled the Dow down more than 25% in three months.

In such an environment, fear takes over and investors care less about distinguishing the differences between individual companies. To a point this makes sense. After all, does it really matter how smart the new CEO of a company is if the credit markets have frozen and the firm can no longer operate?

“What happens is systematic risk overwhelms any of the idiosyncratic risks in stocks,” said Matthew Rothman, a quantitative strategist for Barclays Capital. “Those differences just become less and less important given the overall back drop of what’s happening macro economically.”

Such sentiment greatly reduces the value of picking individual stocks, as low quality names often move along with higher value shares....MORE