"Stock picker's market" is a cliche that gets a bad rap because many market pundits use it as a crutch when they have no idea where the market is going.
But it may actually be true in 2017. More stocks are moving independently from their benchmarks as December comes to a close and that should be an opportunity for active managers.
This chart below from technical analyst Chris Verrone of Strategas Research Partners shows the average correlation of an S&P 500 member to the index itself plummeted to near a 10-year low at the end of last week.
Source: Strategas Research Partners
The lower panel shows the S&P 500 correlation factor for the trailing 65 days falling to below 0.4 after the election of Donald Trump shook the market from its near-zero interest rate slumber and sparked a hunt on Wall Street for the names most likely to benefit from the policies of the unpredictable president-elect.
Normally a big macro event like a surprise election result causes investors to huddle together. Not this time.
"The correlation among S&P 500 stocks fell to a 10-year low last week — the election has been the first macro event in 18 months where correlations have actually declined," wrote Verrone in the note. "As correlations have worked lower for the equity market, credit spreads have continued to tighten as well (positive)."
This is presumably good news for active managers of hedge funds and mutual funds who have trailed the stock market badly this year and throughout most of the seven-year bull market.
This is the kind of market where they are supposed to prove their worth. Let's see what they got.