Monday, October 13, 2008

Stock Correlation Coefficients

As you know, the market is in constant flux. So it's important to constantly search for new ways to make money in the market.

I'm assuming that soon, this "crackhead trading market" that we're currently enjoying will give way to a kinder, gentler market again. One that rewards actual research.

One thing I have always found extremely important when I'm grouping my stocks on my screen, is to place them with other stocks that trade similarly. For example, I don't have JPM with XOM and IBM. Instead, I have JPM with the other bank stocks, XOM with the oil stocks, and IBM with the tech stocks.

One easy way to find out how "correlated" stocks are, is to use robots. Check out this link, type in a bunch of symbols, and you can find out how closely correlated their movements have been over the last 60 days. I've now blogrolled that site.

Here's an example of a search I did. As you can see, PFE is not at all correlated with the ferts.

Anyway, it's a good tool to use. Check it out, once things settle down again, you might find it useful.


MatchPointTrader said...

Thanks much for providing more insight and hints.
Most of all, ***thanks a lot*** for "Everyone Take A Big Breath" post.

TraderCaddy said...

Bingo. I have been doing that for years. I also add the sector etf if there is one for the group. It's easy to tell the R/S and then decide to go with the strongest of the bunch (in an up market) or short the weakest (in a down market)