Investors will be taking advantage next week of some of the last remaining trading days of the year to place their bets on what will be the winners of 2011.
One of the defining characteristics of 2010 has been the strong correlation across asset classes.
Movements in the dollar or in bonds had just as much impact on equities as more fundamental factors, such as corporate outlooks.
The tight relationships came as investors focused on the same factors, further stimulus from the Federal Reserve, sovereign debt worries in the euro zone and the strength of the economic recovery.
The macro focus has meant investors made the same trades rather than differentiating individual sectors and industries.
“No matter how much work you put in trying to pick winners and losers, the profit available from doing so was way below normal,” said Charlie Blood, director of financial markets strategy at Brown Brothers Harriman in New York.
Analysts expect that correlation to ease in the coming year, allowing sectors to see more divergence and affording investors more chances to outperform the market.
“It’s structurally just unsustainable to have that kind of (correlation) because it doesn’t allow for diversification,” said Nicholas Colas, chief market strategist at the ConvergEx Group in New York.
“I do think it has to reverse, it’s just not a healthy part of the capital market,” he said.
Even as investors reposition themselves, the broad market is likely to drift until year-end with next week shortened by the Christmas holiday.
Indeed, Wall Street’s fear gauge, the CBOE Volatility index, or VIX .VIX, on Friday fell to its lowest level since April.
Investors will also take in a round of economic data next week, including the final reading of gross domestic product for the third quarter, new and existing home sales for November and December consumer sentiment.
Stocks that have been the best performers for the year are already seeing a pullback, suggesting investors are happy to lock in profits as they search for fresh opportunities.
Salesforce.com, one of the best-performing stocks on the S&P 500 this year, has backed off this week, sliding 8,1%. Even so, the stock is up
85% or the year.
Mid-cap Netflix, another investor favourite this year, has shed 12,6% since the beginning of December, though that still leaves the stock up some 226% this year.