A big market shift may be creating a sweet opportunity for stock pickers

Stock pickers, as a group, may or may not outperform the broad market going forward. But it looks to be getting a bit easier for them to do so.

After Donald Trump's presidential win, the correlations among S&P 500 stocks have fallen markedly, to nearly the lowest level in two years, Chris Verrone of Strategas Research Partners found.

As stock performance becomes increasingly disparate, the theoretical manager who is skilled at determining which stocks will outperform and which will underperform should generate a greater degree of outperformance.

What makes the drop in correlations especially notable is that it was caused by a large, external event; these types of events frequently cause correlations to rise.

"The election was the first macro event in about 18 months where we started to see dispersion at the stock level," Verrone pointed out Monday on CNBC's "Trading Nation."

The technical analyst also noted that the average stock is now outperforming the S&P 500, thanks to the impressive relative performance of smaller stocks. This is another condition that creates a favorable environment for those who select particular stocks, as performing better than the widely watched S&P 500 becomes easier.

"The stock picker is getting paid to do his job," Verrone commented.

There does appear to be a lot of work ahead. The first half of 2016 was the worst first half of a year ever for active managers, according to a Bank of America Merrill Lynch data set that goes back to 2003.

And of course, not every active manager can do well at once, since the market cannot outperform itself.

If some stock pickers are outperforming the benchmark, that must mean that others are underperforming (so long as the benchmark is a fair one — the group of small-stock managers can beat a large-stock-skewed index). That is, dispersion creates the opening for more dramatic outperformance, but also for more dramatic underperformance.

Still, for active managers anxious to prove their worth, this could be their big opportunity.


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Trading Nation is a multimedia financial news program that shows investors and traders how to use the news of the day to their advantage. This is where experts from across the financial world – including macro strategists, technical analysts, stock-pickers, and traders who specialize in options, currencies, and fixed income – come together to find the best ways to capitalize on recent developments in the market. Trading Nation: Where headlines become opportunities.

Michael Santoli

Michael Santoli joined CNBC in October 2015 as a Senior Markets Commentator, based at the network's Global Headquarters in Englewood Cliffs, N.J.  Santoli brings his extensive markets expertise to CNBC's Business Day programming, with a regular appearance on CNBC's “Closing Bell (M-F, 3PM-5PM ET).   In addition, he contributes to CNBCand CNBC PRO, writing regular articles and creating original digital videos.

Previously, Santoli was a Senior Columnist at Yahoo Finance, where he wrote analysis and commentary on the stock market, corporate news and the economy. He also appeared on Yahoo Finance video programs, where he offered insights on the most important business stories of the day, and was a regular contributor to CNBC and other networks.

Follow Michael Santoli on Twitter @michaelsantoli

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