Growth Stock RBP Probability Spread Returns to Normal

Several weeks ago I wrote about the cause of the underperformance of high RBP Probability growth stocks relative to low RBP Probability growth stocks. The conclusion I drew was that an irrational bull market run and unprecedented support for growth stocks from the U.S. government lead to a breakdown in the typical relationship between high and low RBP Probabilities stocks.

The unusually strong performance of low probability growth stocks waned in September, just as stock prices in general reached a plateau. Whereas low RBP Probability growth stocks had actually outperformed high RBP Probability growth stocks earlier this year, this trend is reversing. Government stimulus directed toward growth companies disrupted the typical relationship between low– and high–RBP Probability growth stocks, but with prices now fully reflecting this government support, the historical behavior of stocks with low– versus high–RBP Probabilities has returned. Indeed, while the DJ U.S. Large-Cap Growth Index returned 4.87% in September, the DJ RBP U.S. Large Cap Growth Leading 30 returned 8.18% and the DJ RBP U.S. Large Cap Growth Lagging 30 returned 3.72%

In fact, all Leading 30 indexes outperformed their Lagging 30 counterparts in September. And year-to-date, the spread between the DJ RBP U.S. Large-Cap Leading 30 and the DJ RBP U.S. Large-Cap Lagging 30 is 24.69% (see table at left on my site). This implies that a hypothetical long/short portfolio of the leading and lagging components would have outperformed the market’s 17.76% YTD return by 6.9%, all with zero net market exposure.

Simply put, over the first nine months of this year, high RBP Probability stocks have reliably outperformed low RBP Probability stocks.