The Flight to Risk Accelerates

Two simple charts to ponder this evening, with the Russell 2000 ($IWM) back to levels not seen since August 1st (when all the fun began) there was a stampede (rebalancing?) into small caps and out of large/mega cap ($DIA $SPY) equity at the close today:


$IWM (green) vs. $SPY (red) 3-minute 2/1/2012

High yield debt was also sold into the close:

$IWM vs. $HYG 3-minute 2/1/2012

What does this mean? And does this have any value as a leading indicator going forward? Well there was clearly some rebalancing going on at the end of the day (the divergence began to grow larger around 2pm and accelerated during the final 15 minutes) – funds moved out of safer areas and moved down the capital structure/risk food chain: From debt/mega-cap equity to high beta small cap equity.

So we have to put on our portfolio manager (PM) cap for a moment. There are PMs who get paid big money to look at pie charts like the one below and decide the right percentages to allocate to each slice of the pie:

Today’s end of day action is just further evidence that market participants are reaching for risk in search of performance/yield i.e. increasing allocation to the blue/grey slices and reducing allocation to the green/orange slices. However, I tend to think that the more than 2 to 1 outperformance of IWM relative to SPY today is a bit extreme and likely to be corrected over the coming hours/days.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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