The S&P 500 has risen 6 percent in as many sessions as of Wednesday’s open, in what many have termed a “relief rally” after a tough run for the market of late.
If the bounce continues, a certain set of equities may perform especially well: The high-beta names. These are stocks that have been proven to enjoy (or suffer) a high sensitivity to overall market moves.
Specifically, there are eight names in the S&P 500 that have betas greater than 2, meaning they have proven to be the most market-sensitive stocks around.
If the market as a whole surges, these stocks can be expected to outperform the S&P 500. Conversely, if the overall market falls, these equities could be in big trouble.
The beta calculation, here performed by FactSet, is based on the correlation between a single stock and the index over the past three years, which is then squared and divided by the variance of the index.
Of course, the future may not look like the past; just because a stock has previously enjoyed a high correlation with the market, does not mean that it will going forward. But it does make sense that many of the stocks on this list would be highly market-correlated.
TripAdvisor, for instance, is a volatile and speculative stock that may be classified in both the Internet and travel industries, two sectors that should tend to do well alongside the overall economy. This mix of volatility and economic sensitivity easily describes stocks like First Solar, BestBuy and Micron as well.
For Andrew Burkly, head of institutional portfolio strategy at Oppenheimer, “We would endorse the idea of taking beta up a little bit” to play for what he sees as a likely fourth-quarter rally, “but the one thing about beta you want to remember is how you got there.
“We’re really looking for high beta that have participated on the upside of the market, not just something that got whacked,” Burkly said in a Tuesday “Trading Nation” interview.
To Burkly’s point, six of the eight highest-beta stocks have fallen 20 percent or more over the past year, perhaps reflecting the propensity of volatility to the downside to outpace volatility to the upside.