The herd mentality gripped the equities markets and exchange traded funds during the recent bout of volatility, moving broad benchmarks in all-or-nothing days. Nevertheless, stock investors may look to brighter days ahead.
According to Bespoke Investment Group, “all or nothing days,” or trading sessions when the number of advancing stocks minus declining stocks in the S&P 500 hit over 400 or less than negative 400, were more frequent in recent months, reports Julie Verhage for Bloomberg.
Looking at the August selloff, on the last Monday market plunge saw 499 of the 502 components in the S&P 500 index falling in unison.
“Since the sell-off really began in earnest on 8/20/15, the S&P 500’s daily advance/decline reading has been above +400 or below –400 on eight trading days through Friday (as of 2PM Monday, the S&P 500’s A/D reading is currently above +400 again),” according to Bespoke Investment Group.
From the period between August 20 and September 1, the SPDR S&P 500 ETF (NYSEArca: SPY), iShares Core S&P 500 ETF (NYSEArca: IVV) and Vanguard 500 Index (NYSEArca: VOO) have declined about 7.1%.
On a 12-day basis, Bespoke pointed out that there have not been this many all or nothing days since the 2011 selloff or the 2008 financial downturn.
Bespoke also attributes the greater correlation among stocks to the rising popularity of ETFs. About 42% of total composite volume was found in ETFs on August 24, the worst one-day decline in four years, reports Chris Dieterich for Barron’s.
“The uptick in frequency of all or nothing days has coincided pretty closely with the increased popularity of ETFs, as buying or selling in securities like the SPDR S&P 500 (SPY) causes buying or selling pressure in each of the securities compromising the S&P 500,” Bespoke said. “While ETFs have been beneficial for investors looking for a low cost way of gaining exposure to the broad market, one of the unintended consequences has been that the daily correlation of individual stocks has increased.”
This also corresponds with previous research that has shown that correlation between individual securities in sectors and markets is also on the rise as usage of ETFs increase. [Increased Index ETF Usage Promotes Stock Correlation Across the Board]
Looking ahead, Bespoke pointed out that markets typically recover after all-or-nothing events, even if it does take a month or more. After the November 26, 2008 occurrence, the markets turned out a positive return of 2.6% in six months and a 25.1% gain in one year. After the October 6, 2011 occurrence, the markets returned 7.6% over the following month, 9.7% in three months, 20.0% in six months and 25.4% over one year.
For more information on the equities market, visit our S&P 500 category.
Max Chen contributed to this article.