Defining Alpha: Euro Financials Have Outperformed U.S. Ones by 9% Since We Suggested the Possibility on 5/31
In that post we commented as follows:
Ostensibly, such out-performance (of Euro financials) would likely be coupled with some positive headline re: Europe’s banking sector troubles, which might positively boost global risk sentiment as well.
Possible spread trade long Euro financials and short the XLF until support lines (1) and/or (2) give way as a stop? If the ratio bounces here it could insulate portfolios that are directionally short, in the near-term.
Since that post, the ratio b/t the DJ Euro Financials index vs. the XLF has risen to 100+ from 92, a gain of nearly 9% in two and a half months.
Remarkably, the SPX is up only 7% over the same period.
In effect, this fully hedged spread trade could have bested the return of a pure long SPX strategy by 200 bps in 2.5 months.
That is called alpha and this is how you bounce back and forth between over-weighting sectors, regions and your long/short bias in general to out-perform.
We remain of the opinion that if Euro financials can continue to outperform their U.S. counterparts, it will likely coincide with additional upside for global risk assets and a tailwind to sentiment in general.