Over the past several years the money that has gone into ETFs has significantly increased. As a result the correlation between stocks from one sector and between stocks in general has ticked up. We live in market environment, where the impact of beta grows stronger, especially during corrections.
We like to think that it is a market of stocks and not a stock market; that equity selection matters. It actually does, but mainly on the way up and when earnings growth is scarce. In the era of ETFs, baskets of stocks are getting bought and sold simultaneously and often the weak rise with the strong and the strong fall with the weak.
Yes, of course if matters if a company grows its earnings by 200% y/y and its sales by 60% y/y. Eventually rising expectations for higher earnings will result in buying and price appreciation. Keep in mind that when the stock market declines, emotions rule decision making and all rationality is thrown out of the window. If you are an investor and the reason you bought still exists, the day to day volatility is just noise that needs to be ignored and corrections should be even welcomed as opportunities to add to a position. The question is, are you an investor or are you a trader and what is your time frame of market engagement? If you consider yourself a trader, price action should be your leading indicator and loss minimizing stops need to be diligently honored in order to survive and prosper. Remember, there is one basic rule in the capital market jungle – fight only battles that you can win.
