Benchmark Trading and Stock Picking in Volatile Markets

Elevated volatility occurs when assets perform in a similar fashion, with prices selling off and recovering together. Correlations are consequently high, and it is harder to add value as a stock picker with many assets performing in line. In such times however, traders using peer-relative performance, may reap rewards from the greater expected mean reversion in stocks over short periods.

Using implied volatility as an inverse indicator of the effectiveness of stock picking, investors should be more focused on sector than stock weightings in energy and consumer discretionary names, and concentrating on individual picks among consumer staples, healthcare, communication, IT and real estate names.

Synopsis:

• When volatility is high, then stock picking may be more difficult

• Using a peer group to guide trading may, however, be more productive

• Stock picking among defensive sectors may be more rewarding than among cyclical

Read the report here.

Written by Simon Maughan, Liquidnet Global Product Manager
+ The Liquidnet Data Science Team