By Rocco Pellegrinelli, Founder & CEO of Trendrating
2022 issued in a new stock market regime that caught many investors off guard. After a decade long bull market, a new secular cycle started in January 2022. The ensuing bear trend produced broad losses over the course of the year. Experts now say that we face years of low-to-flat returns with high volatility and fluctuating indices.
Well, it looks like it is time to reassess the foundations of some investment plans. Investment strategies that delivered, thanks to a bull market, will inevitably disappoint in this new market regime. After years of massive adoption, index investing and passive strategies may well lose their appeal to the benefit of active strategies that can profit from the performance dispersion across stocks. Performance dispersion offers an opportunity to deliver in any market cycle, if one has an active strategy structured to capture positive trends.
Even during the 2022 bear trend with the S&P500 posting a loss of 19%, some stocks generated sizeable gains. In the US large-cap universe of 600 stocks, the top 25% performers for the year (150 stocks) recorded an average increment of +22.7%, and the bottom performers lost on average -43%. In the mid-cap segment of 980 stocks, the average performance of the top vs. bottom quartile was +27.8 vs. -48.6%. Even broader was the trends dispersion in the small cap universe of 1440 securities with +32.6% vs. -63%.
The above statistics give an idea about the actual performance dispersion and the resulting opportunity to capture some of the winners that perform even in the new investing regime.
So how do you spot the winners? How can you gain valuable insights to identify early the outperformers and reduce the risks of picking the losers?
Per our research at Trendrating, the top performers seem to share two key factors – rock-solid fundamentals and consistent buying pressure. Analyzing fundamentals is a well-established discipline. But, assessing the aggregated investors’ money flows in and out of stocks requires an objective, pragmatic, and well-tested methodology to measure the direction and quality of price trends, as trends are comprised of buying vs. selling flows.
If good fundamentals are not validated by a positive price action, then the resulting disconnection highlights a risk.
The next few years offer an exciting opportunity for active managers that can leverage advanced analytics and leading-edge tools like ours as a complement to their investment process.
Source: Nasdaq Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.