Relative Performance in a Time of Crisis

The most dangerous words in finance are, "It is different this time." These words generally are uttered in justification of a bubble, real or imagined. But while assuming human nature and market cycles are different is just asking for it, any market analyst must pose the question statistically on a continuous basis.

The ability to assess whether a set of relationships has changed over a period or whether a directional move is in fact statistically significant is a partial defense against, in Nassim Taleb's words, being fooled by randomness. Without such rigor, any lucky commentator can make his or her umpteenth call of a bottom over a two-year bear market and then run around like he or she discovered America when the market finally rises. Consistent and statistically non-zero correct calls over a period of time are required to tell us whether anyone is adding value or, like mating elephants, simply making a lot of noise at a high level.

Before and After

The unfortunate sequence of events that unfolded from mid-2007 onward left us with a large number of market regimes or micro-regimes (regimelets?). Let's use the July 14, 2008, de facto nationalization of Fannie Mae (FNM - commentary - Cramer's Take) and Freddie Mac (FRE - commentary - Cramer's Take) and its apparent link to a global currency deal as one date of significance, and the Nov. 20, 2008, rescue of Citigroup (C - commentary - Cramer's Take), not to be confused with any other rescues of Citigroup before or since, as another. Which economic sectors in the S&P 1500 Supercomposite have had statistically different returns between that July-November 2008 period and from November 2008 onward?

Sectoral Return Differentiation After November 20, 2008 Versus July 14, 2008 - November 20, 2008 Raw data from Bloomberg

The most significant changes in performance were in the basic materials, information technology and consumer discretionary sectors. The financials and consumer staples sectors witnessed the smallest changes in performance; this is truly amazing, given the huge amount of attention given to the financials.

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Howard L. Simons is president of Simons Research, a strategist for Bianco Research, a trading consultant and the author of The Dynamic Option Selection System. Under no circumstances does the information in this column represent a recommendation to buy or sell securities. While Simons cannot provide investment advice or recommendations, he appreciates your feedback; click here to send him an email.

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