Arete Thursday Newsletter
Low Beta VS High Beta 🛡️🤺
Low Beta versus High Beta! We have a battle going on right now. It’s low beta stocks that are going to win. First, let us define was beta means in the context of a common stock A stock that swings more than the market over time has a beta above 1.0. If a stock moves less than the market, the stock's beta is less than 1.0. High beta stocks are riskier but provide higher return potential; low-beta stocks pose less risk but also lower returns. Think of $NVDA as high beta and $MO as low beta.
With the cursory explanation out of the way. Let us get into why. Privately, hedge funds have been told to deleverage their balance sheets. This is exactly what is happening to the retail investor. For example, you go to buy a stock on margin at your brokerage and you notice they no longer allow that stock to be margined. You have to buy less of the stock or buy it with cash only. Now picture that with the entire hedge fund industry which is $3.8 Trillion dollars. See the issue? They can not simply have them sell right away as it would cause mayhem. So they slowly work out of the position. As Bloomberg reports today, across the entire street, admit fall out from the Bill Hwang incident, Prime Brokers are slashing available leverage for their hedge fund clients. This is why we can not lift on high beta names. This is why when we were oversold and bounce that bounce is muted. Very simply Goldman Sacs created a list of stocks that they call “nonprofitable tech stocks.” This would be your $COIN, Chamtath’s entire Spac collection, $CCIV etc. They created an index of them. Since February that index is down about 40% now. It has nothing to do with the business models of the corporations. It has everything to do with how much stock these funds can hold. Until the deleveraging stops, we will have sharp 1-2 day rallies in the $QQQ met by selling. This will end when the last fund is holding the proverbial bag. It will be classified as another blow-up. The final nail that most likely solidifies the bottom is $ARKK. Why? because $ARKK is not highly leveraged and when outflows stop, they have not even started really yet, that will most likely be our first indicator.
The concept I am explaining is somewhat advanced but if you can get the basics of it you will understand what is happening and can position yourself accordingly. Low beta stocks even with high dividend yields will be able to leverage. The SPACs and nonprofitable stocks not so much.
The key levels are marked on the charts $SPY is the muted King. $IWM is setting up for a turn. $QQQ will have rallies. We are setting up for one tomorrow. We need to hit singles and get out of the way. Do not use the $TQQQ in this kind of environment it is much harder. Rarely, do I ask but this concept is very important as this is a SECULAR change. I would recommend if you have a friend or family member that invests you share this newsletter so they can get a basic understanding of what is happening. This Saturday at 1 pm EST we will go over some of these concepts in greater detail as well as the Top Ten Buy List on @youtube live stream.
Let’s get to it!
Let’s get to the Indexes!
Let’s get to the Stocks!
Subscribe to YouTube! 👈Subscribe and turn on notifications. Below is a video of today’s rotation from high beta names to low beta names. Tons of actionable ideas. Also, I walk through the importance of trend lines. Consider making these videos part of your routine. I go over the lessons from the trading of the pro series during them and point them out in real-time situations.
As always all investment decisions need to be made by the individual. We all have different risk profiles.No two people trade the same. Understand the buy points, stop losses, trims are suggestions. For example on stops. I want to see it close there at the end of the day.
You need to develop your own process. I am willing to help and offer feedback.
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Wishing everyone Massive success!
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