By knowing which style factors are dominant in different market conditions, you can choose the best stocks for your portfolio and maximize your profits.
This chart shows the relative strengths between the most important style factors.
High vs Low Beta: Beta is a measure of a stock’s volatility relative to the overall market. High beta stocks have a large amount of volatility in their returns, and are preferred in risk-on environments.
Growth vs Value: Growth stocks are those expected to grow at a faster rate than the overall market and are good when risk is low. Value style factors are used during Inflation and Deflation modes as a form of safety.
Large Cap vs Small Cap: Large cap companies are typically well-established, stable, and considered lower risk. Small caps are generally newer, offer higher potential returns, but can be volatile due to their added risk, so are safest to own during Nirvana and Reflation.
Momentum vs Defensives: Momentum stocks are those that have experienced strong price gains over a period, and are expected to continue to perform well in the future. Comparing their returns with Defensive stocks is another way to tell if traders currently consider the stock market a risk on, or risk off environment.