If you watch financial news enough you will hear someone come on and talk about how the current market is for stock pickers, but what does that mean? Just watching the market day by day you see times when it seems like all stocks go up or down together and you also see times when there are a bunch of divergences. It would seem to make sense that during times when stocks are moving together that there isn’t a ton of value trying to pick individual stocks. On the flip side, it would seem that during times when there is a lot of divergences between stocks that stock picking would have much more value. As a money manager we have individual stock strategies and strategies that just buy broad market based ETFs. If we could identify times when our stock strategies were likely to outperform and times when it made more sense to concentrate on broad markets, that could be very useful.
Ted Theodore over at QAS just wrote a real interesting piece on how to measure this.