Inside Markets — High-Beta

Yesterday’s broad rally saw ~80% of the SPX finish higher led by high-beta segments that gained +2.8% (1.5z move). Low quality, high-beta stocks have greater convexity than tends to attract retail flows following better macroeconomic data. Recall a two-week long-short squeeze in high-beta stocks followed a better-than-expected June Jobs Report on 7/4. Back then, we suggested the inclusion of high-beta stocks in the ongoing rally only gave the impression of lasting broad equity participation. Broad equity participation is usually led by cyclical groups and precedes a cyclical economic recovery.

While yesterday’s CPI report is enough to start another short squeeze in low quality segments, it’s not enough to start a true cyclical rotation in our view. Rate sensitive cyclical groups like homebuilders/building products should get pulled higher by expectations for rate cuts, but highly cyclical commodity chemical and transports are likely to remain out of favor. If you get the cycle right, those deep cyclical stocks (commodity chemical/transports) have even greater convexity that can last several quarters and may even qualify for long-term tax treatment.