Not at all the same as the GFC
I have been running Aveo Group [ASX:AOG] on my trading portfolio for a few weeks now. In the current environment, AOG has lost some of its shine relative to the ‘non-movers’ in the market. By non-movers, I mean stocks with low correlations with the market.
I’ve identified some interesting trends about momentum stocks such as AOG. Momentum stocks tend to have a higher correlation with the market during crisis periods. The overall downward pressure has an overriding effect on individual stocks.
In this sort of environment, stocks with low correlations do well. AGO has had a reasonably moderate correlation with the market, so it hasn’t done too badly, but it has dropped in value.
I may continue to run it as a long position next week. That decision will be data-dependent.
However, there are some interesting points to be mentioned on the current market.
When you look at the positive return periods versus the negative return periods, 2008–2009 was obviously a unique period in recent history. The decline in returns was quite severe.
One important point to take away is the rebounds during the GFC were as volatile as the drops. It means you should expect more volatility during a crisis and avoid being ‘thrown out’ of the market by the drops. Because you can easily miss out on the rebounds that way.
In addition, we can see that the degree of volatility right now is nowhere close to the GFC. This goes to show that we’re not in a similar situation. Not yet at least.
This finding is consistent with what traders are saying in regard to the options market. Harvest Volatility Group’s Dennis Davitt told CNBC: ‘What we’ve seen out of the options market is the lack of expectations of this sell-off that came, volatility was really muted’.
Basically Davitt says the market is doing rather badly, even when volatility is low. We interpret this as a ‘simple market slump’. It means the market is driven by a few big factors such as oil and China. Investors know things aren’t going well. And there’s not much second-guessing involved. What this could mean is a market rebound will likely be strong and single-minded.
Emerging Market Analyst, New Frontier Investor