A subtle change in the internals of the stock market bodes well for active portfolio strategies such as momentum, relative strength, trend-following and even individual stock picking. The change is a significant drop in correlations among stocks, away from the herd-like “risk on – risk off” moves in which all stocks go the same direction at the same time in the same magnitude. That herd-like behavior dominated the 2009-2015 period, but during 2016 (and so far in 2017), correlations among stocks have fallen sharply, back to levels that predominated in the 1990-2007 era (a great era for those active strategies). The lower correlations typically result in a much wider dispersion of returns, with much greater differences between top performers and low performers. Brian Belski, chief investment strategist at BMO Capital Markets, recently noted that active strategies “will be the key to delivering outperformance in the coming months, as opposed to the more passive strategies that have been mostly dominating the investment landscape the past several years.”
