Wednesday, September 14, 2011

More on the Amazing Correlations

As mentioned lately [Aug 25, 2011: Student Body Left, Student Body Right Trading Returns as Correlations Surpass that of Even 2009, 2010], and quite a few times during the past few years - we have seen an increasing period of correlations as the HFT + EFT, headline news driven macro world dominates.  There have been some periods of relief along the way but for much of the past few years it's been a frustrating exercise in stock picking.  It's either the entire student body to the left... or the right.  FTAlphaville has a research note with a stunning chart, showing the 10 major industrial groups (and their ETFs) and calculates their correlation with the S&P 500.  Every group is at 92% or above, with the 8 of the 10 at ~97% or above correlation with the S&P 500!!!  A dramatic change from even 3 months ago.  Even the foreign indexes (ETFs) are at 96% correlation as the entire globe trades as one.

Individual stock analysis has become a completely moot point at this time.  Either we buy everything or sell everything each day - an incredibly frustrating experience for those who like to analyze individual companies..  (I am excluding asset classes like gold, which of course have diverged tremendously)

[click to enlarge]

[Jun 30, 2009: Bloomberg - Correlation Among Asset Classes Highest Ever]
[Jun 29, 2010: Correlations Among Asset Classes Reach Ever Higher Extremes as HAL9000 Algos Dominate Life]  
[Jul 15, 2010:WSJ - Correlations Soar on S&P 500 Shares]

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