Exploiting Performance Dispersion

In the new market cycle, stock indices can only offer high volatility and low annual returns for the next few years, if history can be of guidance – the sideways market cycles of 1969-1980 and 2000-2009. However, the performance dispersion across stocks is broad and provides the opportunity to outperform. How broad is the performance dispersion? Let us look at some dispersion facts:

It is important to study this table and ask yourself the following questions: How big are the risks if you own some of the bottom 25%? How profitable are the opportunities if you can spot some of the top 25%?

Now the biggest follow-up question you can ask yourself is:How can I profit from this performance dispersion?

The answer is not complicated and is accessible to all investors regardless of investment style or strategy. It is a simple two-step process:

Step one – control the risks by avoiding the underperformers.

Step two – capture the winners by identifying, in time, the outperformers.

Advanced AI-powered price trend analytics and technology developed by Trendrating have been specifically developed to assess and validate price trends in stocks and indices and gain knowledge and insights over performance dispersion.

Over 200+ institutional clients use this research and risk management tool to strengthen their investment risk control and performance management. The introduction of the “rating of price trends” to discriminate positive vs. negative trends earlier and more accurately has been reported by many clients to be more helpful than any other conventional trend-following methodology.

The rating system was designed to be simple, intuitive, and helpful in determining opportunities and risks, especially when the market is caught in difficult market environments – A and B = bull trends, C and D = bear trends.

The following charts demonstrate how the system captures both upward and downward movements of stock prices:

Regardless of whatever is the underlying investment approach, investment managers can benefit from navigating and exploiting performance dispersion but that is very difficult without a methodology that can read, acknowledge, and respect price trends.

Besides just focusing the research and risk management on individual stocks and indices, price trend technology can help you analyze and uncover the embedded risks and opportunities of overall portfolios. This new ability to apply a “trend risk rating” of portfolios adds an additional level of risk management for portfolio managers. The higher the portfolio rating the better the chances to outperform. The lower the rating, the bigger the risk of losses.

Adding a modern layer of trend assessment and validation can only enhance risk control and performance management. Facts win over assumptions. Trends win over expectations.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Source: Nasdaq Inc.

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